4 minute read
Michael Jennings
Columnist
Michael Jennings
Partner , BDO Northern Ireland
The Importance of Cash Flow
During the autumn of 2021, the introduction of the high street voucher and relaxed restrictions within hospitality and leisure venues gave rise to a boost in economic activity. At the time of writing, it is reported that Northern Ireland’s economy grew by an estimated 1.08% with further analysis suggesting that NI had the best post-lockdown bounce-back of any UK region (source BBC news). An additional report from one of our local banks also indicated that retail sales in Northern Ireland had risen for the first time in four months and that employment levels also continued to grow.
However, as we enter 2022, we do so with the hangover of the last two years which has made planning for the future extremely challenging. Nevertheless, underpinning any future business plans will be cash flow and ensuring your business has the funding to achieve its profit and value generation objectives.
As the NI economy adapts to a post COVID-19 world, if such a thing ever exists, the trading landscape has its own challenges:
• The eased restrictions we have all come to enjoy remains fragile with the new Omicron variant and generally rising Covid cases. It seems unlikely that any widespread financial support measures of the type we have seen over the last 18 months will be extended further, or reintroduced.
• The ending of Government support measures brought a hefty dose of reality to many businesses who were reliant on them for survival. What the impact may be on employment and disposable income remains uncertain but inflationary pressures are increasing.
• Recent studies suggest that consumer demand for goods is declining, with a preference of spending on experiences. This may help suppress the current inflation rates seen in recent months.
All these issues make careful working capital management and the creation of contingency plans essential if businesses across all sectors are to avoid unexpected run-on cash resources.
Finance savvy businesses will have carefully preserved cash during the past 12 months, having taken advantage of one or more Government support schemes. The challenge now is to ensure that future cash flows are available to fund the payment of any additional debt, or debt deferrals, taken on.
Cash flow management
In our experience, the management and forecasting quality of cash flow varies enormously. For some cashflow forecasting is in the ‘too hard to get right’ box and therefore no forecast is prepared. On the flip side, there are those who can confidently predict, almost to the pound, the immediate short-term cash requirements.
One thing that is clear, is that management of cash should be a core part of managements’ efforts in all businesses.
Benefits of reliable cash management
Knowing your current and anticipated cash position:
• Provides Confidence This allows management to make spending decisions to take advantage of opportunities in the knowledge that cash resources are available. • Avoids surprises that can cause unrest and concern in teams Late creditor payments and restrictions on trading caused by cash flow issues are demotivational to staff members and can cause concerns over job security.
• Frees up management time While this sounds counter-intuitive, being able to anticipate cash requirements and knowing working capital is under control frees up management to focus on growth and operational matters.
• Can reduce the cost of funding Being able to demonstrate sound financial management can de-risk a position for a lender, allowing them to be more flexible when pricing facilities.
• Enables investment As with lenders, accurate and efficient cash management demonstrates to investors that any investment will be in good hands.
Cash forecasting is not just about best practice in a business-as-usual situation. At the more distressed end, careful cash flow management can make the difference between existence and insolvency.
What should businesses be doing now?
At BDO NI, we recommend that businesses use this time to evaluate their current cash flow forecasting processes to ensure they are still relevant and fit for purpose. In recent weeks, we have seen an increase in this area with a number of clients reaching out to us to assist them in preparing meaningful cash flow forecasts for their businesses. • A good cash flow should: • Be simple to update and read • Be of a sufficient period to cover a working capital cycle • Include an explanatory narrative on what the forecast is showing, suggested actions and key risks or uncertainties • Be built on clear assumptions with capacity to easily amend and test scenarios • Include references to source material, such as aged creditor reports, historical KPIs, and sales targets. This would ideally be linked directly to the dealer management system • Clearly show the level of headroom management have available.
The forecast will be used by management to ensure the business has sufficient liquidity, but also to identify where improvements to liquidity can be made and act as an early warning where standards may be slipping. Underpinning the numbers should be a practical set of procedures that optimises positive cash flow.
A good cash-flow forecast is primarily an essential tool for management use but when designed and communicated well, it will also be capable of suitable for sharing with external shareholders and all key stakeholders.
