Knowledge is power: the importance of cash flow forecasts

By Dean McCormack, Rickard Luckin
It has never been more important for businesses to have a firm handle on cash flow. With the onset of various inflationary pressures and the repayment of COVID-related debt, business owners are increasingly concerned about the impact on trading.
Published in Essex Director Magazine Autumn|Winter 2022

Cash Flow: Rickard Luckin

Looking ahead and understanding issues that could be on the horizon and then planning for them could be the difference between a thriving business and one that must think seriously about its prospects.

In practice, there are several actions that we would encourage business owners to take to understand, safeguard and improve their cash flow. Here are three important pointers.

Prepare and maintain cash flow forecasts

It’s the financial equivalent of checking the traffic before a long car journey, or the weather before a day out. A forecast is vital for management to understand whether there are likely to be any cash shortfalls and when these might occur.

Cash flow forecasts will be based on the budgets that most will already prepare. It is vital to ensure that these underlying budgets can be flexed to reflect potential downturns in trade, so that the effect can also be easily understood.

Forecasts also need to be revisited and updated for actual events. Just because the traffic was great before you left, there is no guarantee it will remain so throughout the journey.

Maximise terms

Are your customers treating your company as a bank? Firstly, ensure your invoices are raised and sent out on time. Review your debtor book with a particular focus on ‘debtor days’ (the period each customer takes on average to pay their invoices). If any of these are outside of your normal credit terms, then a difficult discussion with these customers may be necessary. Still, it could instantly unlock cash flow with relatively little effort.

Similarly, ensure that your finance team is not paying suppliers earlier than it needs to. Relationships need to be maintained, so ensure that these payments are still within terms, but invoices are not paid before they need to be. There may even be some longstanding suppliers you would be comfortable conversing with about potentially increasing terms, which will give you a little more headroom for your cash flow.

Put your assets to work

While raising debt finance isn’t always the answer, if a business forecasts a cash flow issue, it should consider whether it could leverage any of its assets. There is an increasing appetite from lenders to secure finance against owned assets, ranging from more lending against property, plant and machinery to current assets such as the debtor book, or even stock holding.

There are a number of measures businesses can take where cash flow could be an issue, and those we discuss here only scratch the surface. As with anything, knowledge is power, so preparing and understanding a cash flow forecast is the number one task for any concerned business owner.

Problems can be overcome, but this is much easier if all the facts are available in the first instance.

Knowledge is power: the importance of cash flow forecasts 1

Dean McCormack is an Associate at Rickard Luckin

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