What to do if cash is under pressure in your business

Most businesses we work with have had to manage unprecedented levels of change and rethink how they forecast and plan for their future.

If your business is facing liquidity issues, the first practical step to improve the situation in the short to medium term is to prepare a robust short-term cash flow forecast.

Reliable and robust forecasting has always been important, but for businesses that have struggled to rebuild after the pandemic, the importance has never been more critical.

A short-term cash flow forecast looks at your business’ incoming and outgoing cash flows, usually daily or weekly for the next 13 weeks. It is a critical planning tool for assessing your cash position and understanding whether your business can operate within available cash resources. If your business cannot operate with the available cash, you must consider what remedial action to take or how much support you will need to get through the liquidity crisis.

We've identified the seven focus areas that will help you to manage cashflow and get your business on track:

  1. Customer receipts
    To ensure a steady cash flow for your business, consider having conversations with your customers about the option of early or staged payments. Leveraging your commercial relationship with certain customers can be a strategic approach to hasten receipts and improve cash flow.
  2. Supplier payments
    Businesses can consider extending credit or rescheduling payments with their suppliers to alleviate cash flow pressures. In the current economic climate, outgoing expenses may be negotiable, even if the cost has already been incurred. This can be a simple yet effective mechanism to improve cash flow.
  3. ATO
    In response to the pandemic, the ATO has been accommodating towards businesses experiencing cash flow challenges. If tax arrears are causing significant financial strain, it is crucial to engage with the ATO early on to negotiate a payment plan over an extended period. This proactive approach can provide much-needed relief and support for your business's cash flow.
  4. Landlords
    The Government has made it clear that once businesses are open, they should start paying rent or come to an agreement if they haven’t done so already. Tenants and landlords should now negotiate and agree on how COVID-19 related rent arrears will be settled and, possibly, the basis and level of future rent.
  5. Cash conservation measures
    To conserve cash, it is essential to conduct a critical assessment of all expenses and prioritise expenditures essential to the business's operations. Any non-essential spending should be deferred or stopped altogether. A robust short-term cash flow forecast can provide detailed visibility of costs and is crucial to this exercise. By taking a proactive approach to cost management, businesses can ensure they have the necessary resources to weather any financial challenges.
  6. Inventory campaigns
    Inventory may be a significant element of your working capital. It should always be reviewed in times of cash pressure. There may be a build-up of slow-moving or obsolete stock, whether finished goods or WIP, that could be quickly liquidated to release cash.
  7. Additional funding
    In a challenging situation, we always recommend businesses engage with their financier to discuss what support they can offer. This might be a temporary overdraft extension or increased draw-down rates on invoice-based facilities. Before doing so, you will find it useful to prepare a proposal to outline the funding requirements in detail, when it will be repaid, and steps to be taken to mitigate downside risk.

If the above steps are insufficient to alleviate the businesses liquidity issues and it remains a viable enterprise, then it may be appropriate to seek additional funding through equity or debt solutions. Additional equity may be available from existing shareholders and/or specialist funds. Alternative debt solutions may be available through asset-backed facilities, peer-to-peer lending, or direct lending funds.

The current environment is unprecedented, and managing the cash position of your business is likely to require the support of all stakeholders. In our experience, timely, open, and clear communication with stakeholders and a sensible transparent proposal is critical to obtaining support.

Financial modelling – crucial to helping your business

How will a robust financial model help?

A good financial model will enhance your understanding of the key operational dynamics of your business and help you assess the impact of key growth areas and risks. It also allows you to evaluate the pros and cons of strategic changes and decisions, for instance when deciding how to repay deferred debt. In short, it will help you make the right strategic decisions.

The outputs of a well-constructed financial model also make preparation for board meetings more straightforward and highlight pinch points in the coming months and years – mainly around profitability, cash and working capital, and covenant testing. This can be critical during discussions with key stakeholders such as lenders, who will take a great deal of comfort from reviewing a well-constructed set of forecasts when considering any request to borrow additional funds.

Designing the right financial model for you

Our team has a wealth of experience and expertise in financial model building. We have an established methodology we rely on in the scope and design stages. This delivers financial models that are easy to navigate, flexible and tailored to your specific needs, ensuring you have a readily understood model that will meet your business requirements with the right level of detail and complexity.

For more information on how to navigate cashflow management and get your business back on track, please contact your local BDO adviser.