Covid-19 recovery: It’s all about cashflow
It doesn’t take an accountancy qualification or MBA to work out why cashflow planning and management has taken on such significance in the era of Covid-19, but the signals coming from the AccountingWEB community are unmistakable.
Over the past two months, cashflow-related traffic through our Any Answers page has grown by an average of 181%. The traffic volume is almost 10 times it was before the UK went into lockdown in March. Once the cash stopped coming in, businesses and accountants who previously took a relaxed view of cashflow planning had to make some rapid readjustments to see how long they could survive.
And once government-backed loans started flowing, the first thing businesses needed to apply was a cashflow forecast to show the bank.
To date, Excel is probably holding on to its position as the primary tool for cashflow forecasts, but practitioners looking to run the numbers for lots of clients are turning to specialist tools from the likes of Float, Fluidly, Futrli and the embryonic cashflow forecasting facilities now available in Xero and QuickBooks Online.
All of these suppliers have come forward with further materials to help businesses tackle the cashflow challenge, while AccountingWEB’s sites on both sides of the Atlantic are overflowing with practical guides to help businesses and their advisers track and maximise available cash.
This article summarises some of the key points and highlights from those sources to help speed our readers on to more effective cashflow management.
Need for cashflow forecasts
For many accountants, the need for cashflow forecasting is self-evident, whether or not they’re dealing with a pandemic. Xero began 2020 with a webcast focusing on cashflow in post-Christmas hangover period.
A companion cashflow app playbook highlighted how cashflow was a fundamental building block to helping clients define and achieve their business goals. For example, if they want to increase efficiency, grow their business, or do both, clients need to know if they can generate the cash to work towards those targets, or whether more capital might be required.
More recently, many of the firms entering the Accounting Excellence Awards flagged cash management as part of their service portfolios. US trainer Mike Milan (aka “Cashflow Mike”) explains the rationale: “The future of your client’s business is always an unknown and they look to you to guide them through.
“Not only does [cashflow forecasting] provide an invaluable service that helps keep clients afloat… It’s an additional and often untapped revenue stream, but allows for deeper insights and a launch pad for further services.”
Nick Levine is currently hosting a webinar series that is working its way through the requirements and processes of cashflow forecasting to sources of funding if needed and the best tools for different situations. “Cashflow is the most common reason for business failure and the pandemic is going to accentuate that,” said Levine in the first episode. “As the economy is beginning to pick up and some of the furlough support is tapering off, we need to think about cashflow adjusting to medium-term circumstances rather than getting through the pandemic.”
Chris Downing picked up the same theme in Sage’s Trading Out of Trouble webinar last week. The early part of 2021 is going to present some very tricky challenges for business owners who are going to face deferred VAT payments, a “double whammy” of income tax payments in January, corporation tax payments on what might have been successful March and April 2020 year ends – not to mention business support loan repayments falling due.
The CFN's Kirsty McGregor, who is running the 'leave no business behind' cashflow support campaign, summed up the issue: "For the businesses without a plan, winging it and hoping for the best is a highly risky strategy."
The money on offer from government-backed loans may be attractive right now, but most accountants will remind clients that they still need to generate the revenue to pay back those loans alongside all the tax liabilities.
Start with the end in mind
Milan’s methodology focuses on building transferrable value for the business owner, which he defines as “the amount of money the business owner wants to have on hand whenever they decide to do something different”.
Rather than forecasting blind, advisers should be helping clients to define their goals and work back from there. “Results in business do not just occur. They are almost always planned events,” he advises.
After learning about the client’s circumstances he will work the mathematical forecast back from the annual cash need to reach the target. Take a business owner who wants to boost the transferrable value of their retirement pot from £200,000 to £2.5m a 20 year period. Assuming a return of 5% a year, Milan uses Excel’s PMT function to calculate that the client would need to extract £91,654.99 a year from the business to hit that goal.
This kind of ballpark estimate provides a basis for further conversations with the client – and is an important reality check whether their goal is realistic.
Get into the nitty-gritty
As any accountant knows, there’s a mountain of nitty-gritty detail to work from a top-down target such as Milan’s scenario to get an accurate analysis of what’s happening month-by-month in the business – or week-by-week for many companies caught up in the current crisis.
The readymade cashflow apps connect to cloud accounting ledgers to pull in and project the cash coming in and going out over previous periods to give the business a basic snapshot forecast.
Particularly when cash is getting tight, it’s the irregular expenditures that are likely to trip businesses up – such as long-term vehicle leases coming up for renewal, new technology investments or one-off tax charges or other exceptional costs.
Caroline Plumb, the founder and CEO of Fluidly, argues that her tool has moved a couple of stages on from the invoice-driven cashflow forecast by building the actual model for the business or accountant, and basing the cashflow on when people actually pay rather than on invoice due dates.
“No customer actually pays on their due date. To make a good cashflow forecast, you’ve got to capture all the inflows and outflows, including things like rent and overheads that aren’t invoiced,” Plumb told AccountingWEB last year.
The cash budget
Building a cash budget month by month starting with a cash balance drawn from the previous period and working through the inflows and outflows to produce a balance to carry forward to the next month can reveal the underlying variations that will influence longer-term cashflows.
Receivables coming in should match projected monthly incomes – but the payment time lags will soon become apparent, for example if the revenue from January’s sales mirrors aren’t actually collected until March.
“Accounting for the timing differences of when action items are recorded and when they happen will change the way you operate and put you on a more successful path to getting and keeping cash,” notes Cashflow Mike Milan. “It takes the guesswork out of how much money you have at any given point in time.”
In an Any Answers conversation about cashflow forecasting tools in Any Answers Johnt27 flagged up the critical difference between short term cashflow forecasting that is currently in vogue to the “proper” three-way forecasting that takes in cash flows alongside balance sheet and P&L forecasts.
Many businesses AccountingWEB has talked to in recent months have accelerated the frequency with which they produce cashflow forecasts, or added to the forward-looking reports they output, up to and including the full, rolling process where forecasts are aligned to actual figures on a quarterly, monthly or even weekly basis at some businesses.
Forecasting enthusiasts will also subject their models to sensitivity analysis to produce best case, likely case and worst case versions of their forecasts to alert them when they start drifting off course. With tools like Fluidly’s Goal Planner, Fathom’s Goalseek, Futrli’s What If tool and Spotlight Reporting (not to mention Excel), there are even small business apps for that now.
Understanding the business
“Cashflow is the output of a better understanding of running your business,” said Sage’s Chris Downing last week. Going through these exercises allows the accountant to come up with the magic numbers for how much the company will need to diversify or build in resilience, or to understand the implications of the flexible furlough scheme, he added.
Amid the surging demand for cashflow forecasts, some accountants on AccountingWEB recently questioned whether all these activities were relevant for smaller clients. Most small business owners know instinctively what’s happening in their businesses, ran the counter argument. Advisers putting in all that effort ran the risk of disappearing down a bottomless pit of financial modelling and what-if planning rather than getting grips with running the business.
The cashflow resisters may view the new generation of specialist tools as a temptation down this path, but when Accounting Excellence Award finalist Alex Falcon Huerta rolled Fluidly out to all of Soaring Falcon’s clients for free, their response was very favourable and she suddenly had a platform to offer more proactive and relevant advisory services to her clients.
Accountants have come through as the go-to business advisers during the Covid-19 crisis and their services are going to be in serious demand as businesses negotiate recovery, redundancies and further uncertainties ahead with the wider economy, Brexit and yet more legislative change.
Cashflow forecasting has clearly emerged as a popular tool for dealing with difficult and uncertain business conditions and the need for better cash management is clearly on the rise. It would be a rare accountant who chose to ignore what the numbers were telling them.
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