Planning, strategy, goal-setting… they’re all critically important… but without cash, a business is very unlikely to succeed, let alone survive. A resilient business is one with sufficient funds for operations and growth, now and in the future.
Managing cash flow is crucial, especially in a tough business environment. And it’s not just a financial, accounting or ‘modeling’ challenge. It is a business challenge which requires an understanding of the market, the goals, the plans and the priorities.
Let’s simplify this complex subject by looking at the components.
Sales forecasts require market understanding; a deep knowledge of your customers, the competition and market trends to forecast demand:
A business that simply looks at last year’s sales figures and adds a percentage risks being way off the mark. Remember, a forecast will never be entirely accurate so a resilient business will project the best, worst and expected cases to establish a range of possible outcomes.
Perhaps you can access cash from external sources. ‘Traditional’ lenders such as banks are a source of funds but they will
usually require collateral. Current investors may provide capital either in the form of debt or by purchasing shares,
though this may dilute the holdings of existing shareholders.
In some cases, management may contribute either through reduced compensation, cash loans or investments.
Some businesses have assets which they can sell in order to raise capital.
In the current environment, there are government grant and loan programs, but these can produce an artificial sense of well-being.
These sources carry risks and sometimes the promise of additional capital will not materialize. Resilient businesses will examine various scenarios and their implications to cash flow.
Costs of Goods Sold (or ‘COGS’) are incurred to produce and provide your product to customers. Every business is different but COGS might
include the costs of materials used in manufacturing or the costs of personnel in a service business. Reducing COGS (as a percentage of
revenue) increases your (gross) profitability.
General expenses (expenses other than COGS) are incurred across a whole range of business functions: marketing, technology, personnel, rent, R&D, administration etc.
There are usually opportunities to reduce expenses, for example, by choosing a different supplier. Resilient businesses quantify the
returns received from any expense. For example, you’d hope a large investment in marketing generates many business leads. If that’s not the
case, maybe the cash should be saved or spent elsewhere. Accountants can help quantify the return on investment from various categories of
Resilient businesses will forecast outgoing cash in the best, worst and expected cases.
A business may need to make payments which don’t arise from the ordinary course of business. Shareholders may (suddenly) require the payment
of dividends. A lender who has allowed late payments may ask that repayment is expedited. Unforeseen litigation or fines may eat into cash
While these events are often unpredictable, assumptions can still be made in the best, worst and expected cases, which helps cash flow forecasting.
In conclusion, forecasting cash flow requires a good understanding of the entire business and the market. Things can turn very quickly … so give cash flow management the (strategic) time it deserves, especially in challenging conditions.
We’d like to ensure you have the best possible understanding of cash flow so please get in touch to discuss further.