The Importance of Cash-flow Forecasting
I have spent the last ten years working in the finance department of high street brands, one of which was part of a large international group. While I was there, we experienced a crisis, which was obviously on a completely different scale to the much wider crisis we are all experiencing today, but I think the business lessons learnt from this are still relevant which is why I am reflecting on them now during this lock-down period.
The ‘incident’ we encountered is hard to describe, it may have been accounting irregularities, it may have been deliberate fraud by the CEO. I imagine very few people know the real truth. However, working in the UK head office, I got a bird’s eye view of its repercussions.
As soon as news broke within the company, the first thing that happened was each division immediately put their own interests first and started hoarding cash. There was a cash-pooling arrangement within the group (which is when all cash is shared and your bank accounts get swept every day putting you back to 0 whether your bank balance was positive or negative). This arrangement fell apart within a week because each division was keeping cash in non-cash-pooled bank accounts and making all their payments out of the cash-pooled accounts. Divisions that owed each other money wouldn’t pay and it turned into a game of chicken.
Cash very quickly became the most important thing. We immediately put in a strict cash-flow management process and were tighter than a cat’s bottom at letting people spend anything.
Even though our stores were still open and trading, the credit card companies starting holding on to customer deposits. They do this because they are worried that if the company goes bust, the customers will lose their money. However holding on to the deposits almost did put the company under. This lasted about a month and when they finally released the cash to us it ran into the millions.
Most suppliers wouldn’t give us credit anymore so cash very quickly became the top priority and was discussed on a daily and often hourly basis (I’m not even joking!) This perspective never really goes away and even 2 years down the line from the ‘incident’ that cash-flow process is still in place, although it is now discussed on a weekly/daily basis instead of daily/hourly!
The actions that got the company out of this critical situation was engaging expert business recovery consultants to come in and help us manage our cash and to liaise with external parties. It was their work and their negotiating skills that finally resulted in the credit card companies releasing our cash to us.
I hope that what I have told you above has made you realise the importance of having cash and of knowing how much you will have coming in and out!
I know it’s probably hard to know where to start with setting up a cash-flow forecasting process. I normally recommend using a 17 week model as some large payments (eg. rent, VAT) are only made quarterly so using a 17 week model will always give you visibility over the whole quarter ahead of you.
I have seen some models go as far out as 65 weeks! But surely that can't be accurate and seriously, who's got that sort of time on their hands!??
However, during these unprecedented times, even 17 weeks seems like a long way out. Things have been changing so quickly, so a 5 week model is probably more suitable at the moment. I would recommend updating it at least weekly, or even every few days if things are getting tight or your situation changes.
If this resonates with you and you would like some help setting up a cash-flow process, get in touch or book a free call to discuss.