Cashflow is such a basic that almost all businesses will say they understand its importance. However, people often struggle with the tangible actions they need to take to effectively manage it. This is especially true if a change in circumstances places them in a situation they are unfamiliar with.
It would be fair to say we’re in one of those periods right now and never before has the old adage, ‘turnover is vanity, profit is sanity, cash is king’, been more relevant.
The impact of the Covid-19 crisis on cashflow
As we come out of lockdown businesses may have had very different experiences. Some may have been busy while others have been effectively closed and are starting up again.
But how is their supply chain working and at what capacity? What about customers? Will the business, their customers and suppliers simply slip straight back into a normal trading pattern? For many, I would say that is unlikely. And will they be prepared, or even able, to work with the same payment terms as previously?
Notwithstanding the government schemes and support during the pandemic, businesses need to ensure their current commercial arrangements will continue. Will creditors extend the same level of credit against goods and services? Can you assume the overdraft that simply rolled over at every renewal will do so again, and what would you do if it didn’t?
Don’t just focus on profit
Many businesses are understandably profit focussed but now is the time to pay greater attention to your balance sheet. Think what stock do I have, is it the right stock and how much cash is tied up in it? How quickly after spending cash can you get that cash back in the door – and can you shorten that cycle?
You might want to change the way you quote and be wary of big batch sales and extending considerable goodwill and generous payment terms, which while great for the P&L (profit and loss statement) might leave you in a tight cash position. It’s not about the end result either – “they always pay” – or the risk of debtors failing. For your balance sheet and solvency, it is more about timing.
Shortening the cycle to speed up cashflow
So, how do we shorten that cycle, get cash in and protect the cash that we have?
1. Make it easy
Consider simple steps you could take to get cash in more quickly. For example, you might want to incentivise customers by giving them prompt payment discounts.
2. Watch out for customers in distress
This starts with conducting an overarching review of your debtors and continually monitoring. Be mindful of what is normal, for example in payment patterns. Unusual, or a change, in behaviour could be a warning sign.
3. Improve communications with suppliers
Work hard on your communications and in understanding and working with your supply chain. It’s too easy to say we’ll protect cashflow by delaying payments to suppliers, but if everyone did that things would quickly grind to a halt. Your late payment could tip a key supplier over the edge and where would that leave your own ability to trade? Similarly, undue pressure on a debtor could be the final straw for them.
4. Review capital plans
Capital plans should be reviewed and updated post-Covid. How much cash has been allocated towards these? How much capital is already committed? Do the plans, or their timing, still make sense?
5. Review costs
Early lockdown, businesses were looking to cut costs, and quickly. Now is the time to be considering anything else that can be done to change costs, or develop creative solutions to make processes more efficient.
6. Get better at forecasting
Everyone should have a strategic cashflow forecast that goes out at least 12 months. Yes, there will be unknowns but that doesn’t stop you forecasting using estimates and constantly updating and revising as more data becomes available. This should go along with a 13-week detailed forecast, continually updated and learning from those actuals so over time you get better at forecasting.
By Adam Croney, Director