Managing Cash Flow in a Crisis

Posted on the 19 March 2020

Managing Cash Flow in a Crisis

Andy Briggs is a chartered accountant and a director of IA Growth Limited, a strategic growth consultancy supporting SME businesses, along with his colleagues Graham Sleep and David Land.

Prior to IA Growth, Andy was Finance Director for a number of SME businesses over the preceding 25 years, primarily in the retail and distribution sector.  He was runner up in the NEAA Finance Director of the Year awards for managing the turnaround of a national luxury retailer following the recession in 2008/9.  He now works with a variety of small businesses in the retail, agriculture, manufacturing and engineering sectors.

Businesses can operate in the short to medium term even if they are incurring losses BUT not if they run out of cash.

In an ideal world, businesses will have detailed financial projections identifying the expected cashflow over the medium term which can then be modelled to reflect falling sales (if applicable) and delayed receipts (remembering many are in exactly the same situation) to understand the business needs.

But in a realistic world, many smaller businesses are not in the position to have this due to limited resources, expertise, experience, history – the list goes on. Many plans in any case are best guesses and the impact of the current pandemic is anybody’s guess so we need to start from where we are today.

Cashflow comprises two main flows: IN and OUT – where and when is your money coming from and where and when is your money going to. Below I’ve outlined in detail what you need to consider when preparing for and identifying a cash flow crisis.

1.  UNDERSTAND WHAT MONEY YOU HAVE AVAILABLE AND ACCESS TO

Money can come from many sources including sales/payment from Debtors, raised via loans or accessed via grants. In the first instance, build a clear picture of what cash you will have coming in and when as this is critical to being able to plan what you expect to have available to meet liabilities.

2.  UNDERSTAND WHAT YOU OWE NOW AND IN THE FUTURE

You will owe money to a number of different creditors so ensure you have a complete list of how much you owe and when it is due. This will compromise some or all of the following: suppliers (for goods and services), employees (wage and expenses), government (VAT, PAYE/NI, corporate tax, rates, etc), landlords and banks (existing loans).

3.  PREPARE A DETAILED CASH FLOW FORECAST

Your forecast needs to be prepared on a timescale relevant to the business – this may be on a day-by-day basis or at least a week-by-week projection. If, for example, VAT is payable on the 7th of each month and debtor receipts are expected on the 30th of the month, a monthly projection is no use to manage the intervening 23 days. Once you’ve decided on your timescale, you will then need to:

·  Plot your income as accurately as your reasonable estimates allow

·  Overlay your expected payments

·  Remember to include recurring liabilities of existing commitments (for example, monthly salaries, loan repayments)

Update the cash flow forecast with information and revised estimates on a regular basis. Look at trends in sales, how debtors are adhering to payment terms and whether you can flex payments accordingly. Identify the point the cashflow is forecast to breach facility limits and the point you expect it to return (if this can be reasonably foreseen) as well as the scale of the breach.

4.  BE AWARE OF RESPONSIBILITIES REGARDING INSOLVENT/WRONGFUL TRADING

It is obvious these are unique circumstances and that legal guidance may change or be re-interpreted and updated on a regular basis. If in doubt, take legal advice.

To summarise, the key considerations and tips in preparing for and identifying a cash flow crisis are:

·  Gathering information — getting up to date, accurate and complete financial information

·  Managing expectations — talking to all stakeholders in an honest and open way

·  Planning — starting with what you know and refine regularly

·  Learning — monitoring the cash flow plan and understanding key trends

·  Amending — updating the forecast with better information

·  Talking — talk, talk and talk more

Visit our online Support Hub for advice, guidance and resources on running a business during this challenging time. Alternatively, if you'd like support from a Forum mentor, please contact us on info@entrepreneursforum.net or 0191 500 7780.