Managing Your Cash Flow

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Key elements of successful contingency planning for businesses

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Matthew Thorpe, Managing Partner of Haines Watts Hornchurch has some essential tips to help business owners plan financially for the future…

Most business owners I work with are pragmatic, problem solving types already, it tends to be why they are business owners. Of course, the constantly changing landscape during the coronavirus crisis has been frustrating and made planning more difficult.

Most accepted early on that it would not be possible for the Government to make accurate predictions and that the outlook is changing daily, so they have made their own assessment on what was likely and how best they could deal with it.

However, the moving goalposts have been less problematic than they may have been, simply because the expectation was always that they would be moving from the beginning.

Business changes

SMEs Plea May Coroanvirus

The biggest difference in the way managers have approached the business interruption and related planning to normal planning is the starting point;

Usually when building a plan or financial model you can start with a reasonable expectation of performance, whether based on prior year’s performance, market research or any number of relatively reliable benchmarks, then flex it up and down to see best and worst-case scenarios.

Right now, the focus is on building a starting model that is reflecting the worst-case scenario. What costs can I not cut? What is the longest we could be closed for? How much could material costs have risen when we are back? How many customers are at risk of going under?

All the questions that usually form the basis for a negative flex of your basic model have become the core components of the budget process. By approaching it in this way it allows managers to take the business-critical decisions needed to be certain they can survive and then build up, block by block as events unfold, in most cases beating the models and plans they put in place.

We have also seen a significant upturn in managers looking at non-financial models, often doing so for the very first time. Looking at things like staff coverage to identify who to furlough, reviewing productivity to see where there is capacity for someone to pick up additional responsibilities or perform dual roles, and assessing the impact on staff efficiency of home-working and what it does to their motivation and wellbeing.

In many cases, managers are totally rebuilding their plan for the future based on agile working, a more holistic approach to staff management and closer relationships with key customers, suppliers and other stakeholders. Most of these things have been gradually moving into the mainstream in recent years any way, but the current situation has significantly accelerated the implementation of them into a lot of managers’ plans.

Strategic planning, what’s been useful

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Regardless of how quickly the landscape changes, you should never lose sight of your cash flow forecast. Build a simple, flexible model that is easy to update with actuals as they happen and can be simply flexed to show a realistic, pessimistic and optimistic view. Many managers and businesses will already have (often complex) templates and models provided by their accountants, but the three basic requirements to build a useful model are:

A firm understanding of who owes you what, and what you owe to whom on day

1. Who will give you some time to pay and how much. What is the honest state of your customers, who will survive, who might not and what that means for you getting your money.

2. A strong grasp of your cost base. What are you unable to cancel, defer or otherwise not pay? Have you factored in things like any top-up payments you are making to furloughed staff, standing charges for light, heat, water, sewerage that don’t just disappear when a workshop or office are mothballed.

3. A realistic view of what you are likely to generate whilst in the midst of the crisis. Are there grants you are eligible for? Will you be able to take loans? Will you still be completing some work for some customers?

The other thing that has been useful and effective is business owners and managers that have taken the time to make forward-thinking strategic plans.

Returning to business basics like SWOT and PESTEL analysis to see where you think your business will fit into the post-coronavirus world can be used to develop an overall sales plan, where you can review the shape of your team and make sure you have a clear but flexible plan to move forward when the crisis passes.

The biggest waste of time in most cases is any attempt at detailed profit and loss forecasts for the lockdown and recovery period. It is important to have a forecast but what is critical is that it is high level, flexible and easy to use, because it will be changing daily.

Planned and executed risk planning

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We encourage clients to take a clear, three-step approach and document the models developed, the meetings and decisions taken so that there is clarity and ownership throughout.

In times like these it is easy to find yourself going round in circles. Those three steps are:

Survival phase – Assess your cash position, what costs can be cut, what actions need to be taken or stopped immediately to generate or prevent unnecessary loss of cash. This is where your cash flow model becomes key and proactive conversations with customers, suppliers and staff should be happening. This stage is key to give you the peace of mind to move on to step 2 and approach it rationally.

Reflection phase – Following any significant hit to your business, there is an adjustment period. A need to take a step back and consider what could have been done differently and what you want to change in the future. This is as true during Coronavirus as ever. Many businesses could not have done anything differently but there will be owner/managers right now re-assessing their cash retention policies, credit terms and any other number of things within their control that, managed more prudently, may have eased the burden now being faced. Now is the time to be honest and make pro-active decisions to improve any areas of weakness. This then extends to looking forward and completing all the normal strategic analysis to see where your business fits into the future and what, if anything you want to change to give the best opportunity for success.

Practical planning – When you have done the work to ensure your survival in the short-term and considered what you want the future to look like, it is time to plan. This phase is about building high level profit & loss forecasts that reflect your strategic approach, developing organigrams to see how your knew team looks and where responsibilities sit, system and procedures manuals that ensure the whole team has clarity and is pulling in the same direction. Putting together all the practical tools you need to have confidence that you are prepared to put your plan into action and make it successful as the new normal unfolds.

Moving forward

Whilst the impact of coronavirus has been unique because it is so all encompassing and felt so sudden, there are parallels with other situations many businesses go through in their lifecycle. The sudden loss of a major customer, for example, can have very similar short-term impact on a business’s cash flow and necessitates the same kind of disaster planning to ensure recovery; the instant tightening of the purse strings, negotiations with suppliers, reviewing overhead and staff costs.

Whilst nothing is likely to compare to the feeling of helplessness and lack of control being experienced by so many business owners and mangers in the current crisis, businesses routinely go through ups and downs. Business owners are resilient and often used to working through adversity so applying many of the experiences and plans they use in the course of ordinary business can set them in good standing to survive the current crisis and emerge ready to thrive.

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