Whether you are looking for funding to help your business survive the current economic climate or looking for funding to help you capitalise on opportunities for growth, cashflow forecasts will be a key tool. Weak or poor quality cashflow forecasts and management information can make it difficult to communicate clearly with banks and investors.
Our fourth monthly ‘Rethinking the Economy’ poll of 500 mid-sized UK businesses showed that more than seven months into the pandemic, cash flow is the biggest immediate business concern for almost a third (29%) of medium-sized businesses surveyed.
In this article, we’ve identified five opportunities to rethink and improve your cashflow forecasting. This will ensure clear and transparent communications with your stakeholders.
1. A clear explanation of the business model
Lenders and investors need to understand your business model. This includes understanding the nature of revenue flows and any seasonality that affects income potential over time under normal trading conditions.
The cashflow forecast also needs to include sufficient detail, for example; by showing distinct income streams separately, how those incomes have been impacted and what investment might be required to get back to a ‘normal’ position. Similarly, rather than averaging out expected costs, an informative forecast identifies in detail when these are likely to be incurred.
2. Clear documentation of business assumptions
Every cashflow forecast depends on assumptions, whether about future sales, cost of sales and the potential growth opportunities from new markets or products, to name a few. Unless these assumptions are clearly set out and justified, they cannot be challenged and the validity of the forecast assessed.
3. Failure to address changing business risks – not just for now, but when we get to a ‘new normal’
Recent events dramatically emphasise that no business environment is static. As well as a short-term liquidity forecast, you need to show you have considered any and all risk factors that could affect future performance.
For example, what will be required to ramp up business to get back to being cash-flow positive and what time frames have been considered? How will the business model change to de-risk dependency on international suppliers? What impact would there be for a UK-based business trading internationally under WTO rules? What would be the impact of a short-term increase in supplier costs?
Preparing forecasts for different risk scenarios helps to identify how cashflows behave under continued economic pressure.
4. Management information packs that are fit for purpose
A high quality management information pack highlights how the business has performed against forecast – but it also communicates the level of management diligence in tough times. This enables robust discussions about any areas of weakness and the speed with which potential corrective actions can be taken.
This performance reporting also needs to be up to date – given advances in cloud finance and accounting technology, automation of daily and weekly reports will be key so that action can be taken in good time.
5. Presentation for presentation’s sake
How you present information can be as important as the information itself. A mass of data in a chunky report is likely to obscure key messages about performance – and why funders should support the business.
It’s more helpful to focus on Key Performance Indicators (KPIs) that are critical for survival and success, such as cash at bank or customer churn. Some KPIs may benefit from the setting of tighter thresholds, to act as warning flags if things are going off course.
How we can help
What do good cashflow forecasts look like? The question we often ask is ‘Are your budgets and forecasts fit for purpose?’ No one has a crystal ball, but our scenario planning approach helps to test the underlying resilience of the business and can help build a picture of where it is heading.
Having years of experience working with funders, including venture capital, private equity and banks – we’re able to help your management team to prepare integrated forecasts that both business owners and lenders and investors find useful.
We are available to discuss your cashflow forecasting and management information and how it can help your business. We have produced a brochure to show how we can help.
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