Though it seems nothing is predictable right now, developing a cash flow forecast can help you predict the funds you’ll have available to pay your bills and your employees in the weeks and months to come. One of the tools we help clients develop is a 13-week cash flow projection, which can forecast shortfalls, contribute to financial stability and give you the peace of mind of controlling this critical piece of your financial health. In this article, CSH discusses why cash is still king, and what you can do to keep yours flowing. 

We’ve all heard the expression “cash is king,” but never has this saying been truer than it is today. Cash (or rather, cash flow) is critical to the long-term health of a business if it is to survive the Covid-19 pandemic. Leadership’s primary responsibility in this environment is to keep cash—the lifeblood of a company—freely available and flowing.

Understanding what your cash flow looks like today is critical, but so is understanding what it will look like a week from now, next month and three months from now. For many companies, times have been good—results have been consistent and predictable—so there hasn’t been a strong focus on strict cash flow management or cash flow planning. Those times have changed.

Develop cash flow projections.

A great first step is to develop a rolling 13-week cash flow projection to get a picture of what cash flow looks like today and what it may look like in the coming weeks. This will help you predict shortfalls, so you can plan and act when necessary. This 13-week model can be used across industries and is used by many turnaround advisors to keep a close watch on the pulse of an organization.

Why 13 weeks? This time horizon is short enough to support agile, tactical decision making, but provides a long enough view to drive longer term decisions. It strikes a balance between accuracy and range. The 13-week cash flow projection is a forecast—it is not meant to be an exact measure of your company’s cash balance at the end of every week. Actual results will vary from your forecast, especially in the later weeks, but the projections will help identify where your cash balances are trending. A 13-week time period provides enough of a horizon to have an impact on strategic decision making, while remaining short term enough to provide a degree of accuracy.

If updated on a weekly, rolling basis, the 13-week cash flow projection becomes a powerful tool to identify changing needs and anticipate how and when liquidity shortfalls could occur. It therefore offers companies the ability to prepare for, if not rectify, issues before they materialize.

Another benefit of the 13-week cash forecast is that it is often a requirement for bank reporting or lending requests.

You’ve identified a shortfall. Now what?

By using your 13-week projection, you’ve identified a future cash crunch, or worse, a shortfall. Now is the time to put a cash flow plan in place to maximize liquidity. Start by asking yourself the following questions:

• Have you identified discretionary expenditures and halted such expenditures?
• Have you considered delaying payment on non-essential vendors?
• Have you taken advantage of the various government funding resources available? Are there other sources of funds available? Are you leaving money on the table?
• Do you have a CapEx plan? Can you delay these items without hurting operations?
• How many operating days of backlog do you currently have?
• Have you discussed accounts receivable with significant customers to ensure you understand the time of payments for outstanding accounts receivable?
• Are you in compliance with insurance provisions for loss of business during this calamity? Are you able to demonstrate your loss?
• Do you have a budget/forecast for the current year? Have you adjusted your forecast based on current circumstances? Have you considered various scenarios to pinpoint when critical action is necessary?
• Prior to starting large projects, are you considering the cash flow implications and pushing for accelerated payment terms?
• Are you monitoring and minimizing employee overtime?
• How much capital can ownership inject into the business?
• What access does the business have to collateral?
• What access does the business have to cash flow reserves?
• Have you discussed options for additional financing with your current lender?
• Can you decrease inventory levels without losing sales?

Preservation and survival of organizations during Covid-19 will depend on their ability to maintain cash and liquidity. Contact your CSH advisor to discuss ways your company can get a better handle on your cash flow needs. Let’s work together to develop your 13-week cash flow model and identify strategies to reduce expenses and maximize your liquidity.