George Fandos April 6, 2020 at 5:19 PM

As the Coronavirus Pandemic continues, CFO's and Controllers are critical resources to ensure that enough cash is available to keep the business afloat.  Tough decisions need to be made about reducing ongoing payments to suppliers and managing the cost of ongoing labor. 

In order to help with this, I have inserted below an excerpt from a colleague of mine.  He originally posted this in LinkedIn where you can find the article here: https://www.linkedin.com/pulse/cash-flow-forecasting-stay-afloat-john-kahn/

Forecasting bank account balances and the operating environment for a business can be analogous to forecasting water depths and the boating conditions for a river. Some of the underlying river aspects (e.g. weather related) vary in predictability, while others (e.g. tides in/out near a river’s mouth) are highly predictable. Regardless, depths and conditions can also be heavily affected by charted and uncharted geology. 

Disclaimer-These general comments are intended for businesses that are solvent and able to meet their obligations as they fall due. If at any time that may not be the case, it is recommended appropriate legal advice be promptly obtained and followed.

In boat vs. business terms:

1. It’s not good to “rip the bottom out of a boat” by prioritizing looking back at its wake and where it has been (historical results) while ignoring where it is going and shallow water/large rocks ahead. Also, reviewing the latest weather forecast is strongly recommended before going out, as is staying home if a major storm is forecast. Once out, if weather/forecasts significantly worsen, wise boaters head for the nearest safe harbor.

  • In business terms, generally looking ahead is more important than looking back. It provides time to gather information and to allow actions to be taken to avoid, or mitigate as far as possible, issues identified. It also allows for pro-active, not just reactive, decision-making. Forward looking cash flow and cash balance forecasts are vital in difficult or changing circumstances, and, particularly, with limited cash resources. 

2. If necessary, boaters should adjust course to avoid rocks (whether submerged or visible) based on charts and what can be seen. Also, if weather/water conditions change, or new forecasts are received for the time frame expected to be on the water, boaters should plan to change their speed to adjust reaction time to the new conditions and/or change the planned destination, and/or even change their go/no go decision.

  • In business terms, generally a forecast should extend far enough ahead to provide time to react and take action in respect of any reasonably foreseeable issues. If a negative cash balance is forecast, consider how cash receipts could be accelerated (e.g. offer a discount to customers who pay early) or generated (e.g. add new customers, obtain or increase a loan). Also, consider how cash payments could be appropriately delayed (e.g. income taxes) or avoided (e.g. don’t buy non-critical items). Additionally, how can peaks/troughs be smoothed to improve low-point(s). 13 weeks is a common time-frame a private equity firm or lender may ask its portfolio companies to use, although shorter or longer periods may be more appropriate for an individual business.

3.In shallow water, up-to-date charts that use an appropriate scale with the right level of detail for the journey planned are very important, as is knowledge of any local tides. These are less important for any deep water part of the journey. Similarly, with a dark sky and storms possible, it is more important to keep checking for weather forecast updates, than if the sun is shining with perfect weather all around and forecast to continue. 

  • In business terms, this generally translates to mean adequate granularity (e.g. weekly flows/balances), refreshed as frequently as appropriate, with as much accuracy as is sensible. The lower the lowest cash balance “water level” during the forecast period, the bigger the payment “rocks” possible, and/or the less predictable the individual cash flows, the more important the granularity, refresh frequency and accuracy are, as well as a possible need to forecast further out. Weekly granularity can be as effective as daily if all payments are planned for Fridays (or anything to be paid earlier in a week is forecast for the prior week). That approach means a weekly refresh is typically appropriate, unless low point cash balance “water levels” are so low/unpredictable that more frequent refresh/review is needed, or so high and predictable that a less frequent refresh/review is reasonable. Accuracy can be refined over time, but insufficient reaction time removes otherwise available options and it is important to avoid surprises, particularly on the downside. 

4.It’s never good to run out of fuel and best to secure an emergency fuel reserve when fuel is plentiful.

  • In business terms, generally “cash is king” and it’s best to ask for a bank line of credit when it’s not needed.

Topics: cash flow management, cash forecasting

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