When Cash is King: How to Ensure You Get a Handle on Your Cash Flow

Businesses are under a lot of pressure. Many have temporarily shut up shop or found new ways of working, while the government steps in to offer support. Business leaders are juggling changing priorities while seeking to protect employees, respond to risks, and prepare for the long term.

Against this backdrop of changing economic and operating conditions business leaders are overwhelmed. Just a few months ago, most were expectant of forward progress in 2020 – this even at a time the average UK small business was owed almost £35,000 in late invoices. Now, with revenues being hit, market unpredictability, managing employees and the challenges of paying creditors and overheads, cash flow is under increased scrutiny.

Among the unpredictability one constant remains: cash is king. To protect the king and put organisations in the best possible position to rebound quickly, finance teams need to focus on two key areas: visibility and control. That means being able to immediately understand the underlying financial health of the business to make smarter, faster and more confident decisions.

Here’s how.

The Details: Finance teams need to gain visibility into every line item

Access to capital is always critical and has shown to be one of the top reasons businesses fail. Therefore, visibility into finances must come before reactive decisions that may otherwise be made on assumptions or gut feel.

Determine liabilities and short-term cash requirements. A fall in demand or disruption to the supply chain will have an immediate effect on cash flow. So, finance teams must first take stock of the resources in reserve, pending liabilities and outstanding receivables, then make an estimate of how much cash it will need to sustain operations for a variation of timeframes, from weeks to months.

Evaluate receivables risk. This cash forecasting should include best- and worst-case scenarios for payments owed. Remember it is not a “business as usual” time for companies anywhere at the moment, and it’s likely that days sales outstanding (DSO) and bad debt write-offs may increase as customers struggle with their own cash flows.

Continually monitor KPIs. Monitoring key performance indicators (KPIs) of priority processes is particularly important when dealing with economic uncertainty, as an organisation can’t manage what it can’t measure. KPIs help finance leaders spot performance issues, such as late payments, while there’s still time to adjust. Monitoring needs to be in real-time, as standard monthly or weekly reports don’t provide early warnings to cash flow inefficiencies.

Use data to forecast several scenarios. Once a business has visibility into the above elements, finance teams should use the data to run some tabletop forecasting exercises based on the most-likely scenarios. This will allow them to quantify the impact to profit and loss statements, cash flow and balance sheet over the short, medium and long term. It’s important to remember that there may be upsides too – alternate business models or new ways to serve customers that hadn’t been taken advantage of in the past.

Ensure organisational alignment and communication. To ensure ongoing visibility, mandate the finance team’s position in a response team with key stakeholders from across the business. This will keep everyone aligned, informed and engaged, whatever actions are ultimately taken, and ensure they are underpinned by accurate financial data and forecasts.

Controlling Chaos: Finance teams need to help their organisations grab control of the wheel

Planning and control go hand-in-hand. Once the finance team has got a handle on an organisation’s financial health, and considered how various situations might play out, it can start to get the business in shape by steering the cash flow factors it can control.

Adopt a shorter planning window. Most businesses operate on a 12-month budget cycle and manage strategic plans with longer timeframes, but during periods of extreme uncertainty, the focus must shift from long-term to immediate priorities. Using a 30 to 45-day window allows a business to plan immediate actions, whether relating to payroll, cutting costs, or maintaining liquidity.

Check payment terms with suppliers and buyers. With virtually no exceptions, everyone is feeling the effects of the current situation. Suppliers, landlords, lenders, tax authorities and insurers should be willing to collaborate to support as many people as possible. Each has a vested interest in the long-term health of the economy and may be willing to help by extending or deferring payments.

Review budgets and identify sources of cash – even if you don’t need them yet. There are likely to be many budget lines that can be trimmed in a world where most people are working from home, or future initiatives that may not now happen as planned. Reviewing these and scaling them back can be a useful source of additional cash. According to a recent Gartner CFO study, 58% of CFOs have cancelled conference spending and 51% have frozen travel and expenses. A review of non-essential contractors, if it does not overburden employees or adversely impact the business, can also help, as will reducing employee perks like lunches and client entertainment. Furloughing staff is also being commonly used to free up cash but should be approached with caution. While it may help in the short-term, losing experienced, productive team members might only make it more difficult to succeed when we return to a more normal footing.

Focus in on inefficient processes and tasks. During periods of growth, some level of inefficiency is tolerable, but when companies need to contain costs, it simply isn’t an option. Eliminating inefficiencies by redesigning sloppy processes and automating manual tasks, such as chasing late payers, can improve cash flow in the short term and better position an organisation to adapt in the long term.

Finally, consider loans very carefully. Taking on debt to generate immediate cash and help weather the storm is a big decision. Managing debt comes down to having a clear understanding of what an organisation requires in terms of cash flow, and how likely it is to pay off any debt after. If an organisation expects operations to return to normal in two months, or even six, it might make sense to draw down on a line of credit while interest rates are low. But it’s not a decision to take lightly. Organisations must stay in control and understand that borrowing could land them in a weakened financial situation if not considered and planned properly.

A new normal

While no one knows what a post COVID-19 world will look like, what we do know is that businesses are beginning to rebuild and will thrive again. New ideas will spur new skillsets, business models, and even new industries. At the heart of this change will be a new type of business resilience that will create opportunities.

Being able to evolve quickly and make fast, well-informed decisions will be key to this resilience. To do that, businesses need insights from the finance team. By reviewing cash flow forecasts regularly, keeping tight control of cash and an eagle eye on the balance sheet, the organisation will be best positioned for future success. And in the process, the finance function can create value and elevate its role as a strategic business partner for the long term.