Cashflow forecasting vital for challenges ahead

Cashflow forecasting vital for challenges ahead

Economic activity is beginning to increase and business confidence is slowly recovering – so companies need to be focusing now on shaping a strategic approach.

That’s the advice of Mark Brown, our audit, accounts & business assurance partner. He takes the view that businesses can put a number of practical steps in place as they seek to step up activity in pursuit of their growth and sustainability goals.

Mark says that, while it’s important for enterprises to invest in the ‘chase for sales’, it’s equally vital for them to ensure that working capital is in place to be able to deliver orders. More than that, cash flow forecasting is essential to clear the hurdles set by the Covid-19 pandemic.

A recent report confirmed that Scotland’s economy has recovered half of the fall in GDP which followed the implementation of the Covid-19 lockdown. However, the State of the Economy report added that business activity may not return to pre-pandemic levels until the end of 2023.

The end of the coronavirus job retention scheme (CJRS) – the furlough scheme – at the end of this month, and among other measures, the introduction of the new Job Support Scheme from November 1, mean companies will inevitably face financial dilemmas soon as they seek to remain viable.

Mark said: “It’s extremely difficult to forecast your cashflow in the current situation, but at the same time it’s essential to sustain a model that can be amended as different situations arise. Businesses will be asking: ‘what’s next?’ They realise there’s a very long way to go.

“Keeping an eye on the financial ball is paramount for businesses, even as they focus on their priorities of keeping themselves going in the short term and dealing with issues as they arise.

“Many companies have cut their costs and have taken government grants and loans. In addition, VAT and income tax payments have been deferred, while working capital has been replaced by the loans. Is there anything left to cut or additional low-interest rate money to borrow? Are they running out of options? The new job support scheme affords flexible support when considering a core cost – payroll.

“Many firms are relying on a pick-up in business to keep them going. The question, of course, is whether this is going to happen to any great extent, and when – it remains to be seen whether the economic recovery will be sustainable.”

Business failure statistics historically show that many companies over-extend themselves in an economic upturn, leading to unsurmountable financial problems in the longer term.

Mark added: “Many firms are good at riding through the storm, but then they try to grow too quickly again. Consider a business that holds stock; it’s run down its stock levels and realised the cash for that.

“When things pick up and orders start coming in again, it goes back to suppliers to re-stock and perhaps needs more staff. It must have the finance in place to support these outgoings – then there’s a period before the money comes in from customers. It’s a critical phase.

“There are several questions to consider. Are you in a position to accurately monitor your financial performance? What are your Key Performance Indicators and how closely are these monitored? Have you prepared financial forecasts and, more importantly, are these periodically updated and compared to actual results that are accurate? Have you made provision for the cashflow impact of repaying additional borrowings and soft loans? Will reduced staff numbers be able to deliver the sales and service delivery targets that you are forecasting?

“It’s a time for straight thinking and getting back to the basics – being aware of your cash flow, reviewing forecasts and keeping an eye on your management accounts. Executives should be looking after the core business while accounting advisors – in-house or otherwise – can oversee the financial aspects of the operation. The situation remains fragile and decisions, good or bad, will have lasting impact.”