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Managing Liquidity with Cash Flow Forecasting

October 12, 2021

Building resilience and managing liquidity are top priorities for many companies but COVID-19 has presented us with a crisis situation and a new type of financial normal. This fundamental shift in economics and business operations means that companies need to approach the challenge from a new direction to ensure they are implementing the most effective solutions.

Fighting back against Tough Trading Conditions

Lockdown and public policy measures designed to minimise the spread of COVID-19 have had a major negative impact on many businesses. Staff under quarantine or remote working, disrupted supply chains and inventory management challenges, import/export issues and reduced customer demand resulting in lower revenue and reduced cash flow have created difficult trading conditions.

The effect is far more fundamental than many could have anticipated at the start of the pandemic, with capital being squeezed tight and funding requirements far more difficult to fulfil than usual due to the current economic climate.

There are a number of new issues for businesses’ financial directors to contend with, such as slower timescales for credit approval. Coupled with an unprecedented level of urgent funding needs, we are living in a pressure cooker situation. Cash and working capital are under more strain than ever which makes the challenge of managing liquidity far more complex and unpredictable.

Key Questions to Ask

  • Do we have any short-term urgent financial demands to meet?
  • How much capital will we need to fulfil these?
  • What are the requirements/downsides to our potential financing solutions?
  • Have we set up liquidity initiatives?

Action to Take

First, you should consider the main “what-if” scenarios that could impact your company specifically. This might be a drop in sales, loss of key supplier or temporary/permanent loss of key person, the latter could be an older partner in the company that may be especially vulnerable to the effects of COVID or Long Covid. Model your cash flow needs in the short- and long-term in the light of these scenarios and revise your “what-ifs” on a regular basis.

You should also revise your protection insurance strategy and make sure your finances and people are best protected. Looking at the “what-ifs” will avoid any future shocks and help key people to make effective decisions and design a sensible response strategy.

It will also help you to reforecast trading and cash flows, and communicate your strategy effectively with external shareholders, suppliers and any other parties whose confidence in your company is invaluable.

Understanding your Minimum Financial Requirements

You also need to understand your minimum cash and liquidity requirements. In their piece on COVID-19, finance and liquidity, PWC advises asking yourself how much cash you have globally, where it is located and how accessible/restricted it is.

This will also help you to identify key cash flows that may be exposed and increase awareness or cash reserves or shortages, all of which provide the cornerstone for identifying viable cash flow opportunities. Along similar lines, it’s important to take action to preserve current working capital and identify any prospects for quick, cash flow benefits.

Once you have a full picture of your financial position, you can begin the next stage. This is likely to be three-fold – identifying areas where cash can be saved, identifying areas with the potential to generate cash, and exploring avenues to increase access to funding.

Bonus freezes are just one example of ways that you could immediately reduce outgoing cash flow while revising your production targets may also be impactful.

Why is Cash Flow Management Important?

The issue with COVID-related financing solutions is that more standard responses may not fit. This is why the guidance of a trusted adviser will prove invaluable. Companies will also need to consider the way that smaller decisions could impact cash flow across the wider enterprise.

Strong liquidity and effective management of working capital is essential. It creates cash flow and improves commercial performance via improved perceptions of your company, better investment capacity and enhanced shareholder value.

While many companies struggle to control cash flows even in more peaceful economic times, it is the best way to protect your business against market, economic and operational changes as well as employ better risk management.

Our advisers will guide you in building the best solutions for your business and effectively navigating the uncertainty of COVID-19. Give us a call today on 020 8371 5232 for specialist guidance and support.