The impact of coronavirus (COVID-19) on business means effective cash flow analysis and forecasting has never been more important. For small and medium enterprises (SMEs), where there are tangible risks of business failure, heads of companies should work closely with their finance teams to make quick changes in cash management to ensure their continued survival.
This guide outlines key principles, and some practical actions companies can adopt to improve their cash flow processes, analysis and forecasting as they navigate through the COVID-19 pandemic.
According to Rick Payne, Technical Manager of ICAEW’s Business and Management Faculty, an expert on building effective finance functions and business performance management, “finance professionals are key in supporting their businesses through the COVID-19 crisis. Most will be urgently working through the issues the pandemic has raised and helping their businesses respond. Here are some actionable steps they should take into account when considering cashflow.”
Focusing on financial management and dealing with the COVID-19 pandemic will require a holistic response and careful prioritisation. Therefore, financial management actions and process changes should be designed to support business managers and employees, who will all be under pressure.
Eight principles for adapting your approach to the current crisis:
1. Ensure responsibilities, reporting lines and resources for all cash flow related matters are clearly understood throughout the company
2. Set-up regular meetings involving employees with insight on predicted cash movements
3. Combine business experience with evidence to improve forecasting effectiveness
4. Design cash flow reports to support critical business decisions and funding applications
5. Maintain control over cash flow reporting
6. Increase frequency of cash flow reporting so it takes place monthly, weekly or daily
7. Maintain as much data as possible on debt and cash flow
8. Exercise good practice and be consistent in structure when preparing cash flow modelling
Whilst companies should use these principles, the circumstances of each business are unique, especially for SMEs. Therefore, keen judgment is required in selecting which of the ideas need to be acted on.
Other things to remember are that cash flow forecasts should also be easily understandable and prepared without the use of accounting jargon for the benefit of all managers. Companies should also clearly document all assumptions, risks, market insights and feedback obtained from third parties when preparing these forecasts.
Practical actions SMEs can immediately adopt to improve cash flow:
1. Manage cash outflows, including making changes to financial management actions and processes where required.
2. Seek professional advice by speaking to a Chartered Accountant or business adviser.
3. Manage cash inflow including regularly reviewing aged debtor schedules to keep updated of when customers are anticipated to pay.
4. Check if you qualify for Government stimulus packages such as ‘Prihatin SME Plus’ which assists SMEs by waiving certain interests and provides wage subsidies.
5. Refresh your cash flow forecast on a regular basis, by doing the following scenario planning:
- Plan for a range of scenarios. One approach is to categorise events such as natural disasters, technological emergencies, and pandemics, and consider how such events would really affect your business or key suppliers. For example, flooding might not pose a significant risk to an online business but a breach in data security would severely impact its operation.
- Keep data up to date to ensure that your forecasts are robust.
- Apply sensitivity analysis to help account for how changes in variables such as revenue, rent costs and floor space impact your forecasts, and highlight the pinch points for the business.
- Conduct periodic reviews. These are essential for scenario planning and to ensure forecasts evolve with the business, its environment, and changes to the wider economy.
- Consider who provides input to the forecasts and who reviews them. An inclusive approach will provide different perspectives which might help boost morale and shape future strategy.
Loh Wei Yuen, Head of ICAEW Malaysia said “As Malaysian companies continue to operate during the Conditional Movement Control Order, decisions around cash flow will be fundamental to the survival and long-term viability of businesses, particularly small and medium enterprises. Apart from this, employee morale and performance will also be impacted by cash management decisions.
“Harnessing insights from our community of business professionals, ICAEW actively creates practical resources for our members. We wanted to share these insights with local businesses, which will help them systematically work through these challenges.”