Alistair Hynd

Written by: Alistair Hynd

Alistair Hynd

Partner

Of kings and swans: Cash forecasting during coronavirus

The world has been turned on its head by coronavirus, but one eternal truth, brought into sharp relief by current events, is that cash is king. As the world adjusts to this blackest of black swan events the need to understand, forecast and adapt to this fast changing business environment is vital to survive the choppy waters ahead.

If you don’t already have a robust cash forecasting model, you will need one. If you do have a model, you may want to check that it is fit for purpose, capable of reflecting the evolving operating and funding environment, and able to support the decisions this will drive.

Financial modelling and cash forecasting have always been about gaining confidence in your plans and numbers, and instilling it in your stakeholders, specifically those providing the cash. Most businesses will need to update plans and forecasts, and then communicate and engage with lenders and other third parties. Get this wrong and confidence will disappear quicker than a supermarket’s stock of toilet paper.

So what does a fit for purpose model look like against the backdrop of coronavirus and what questions should you be asking of yourself and your business’s models?

Fit for purpose forecasts

At its most basic, you need to ask yourself 'does my forecast model reflect my current business today and the decisions I am going to be faced with? And is it good enough for lenders and investors?'.

This question of fitness for purpose is not as simple as it sounds. Most models are built assuming business as usual and many may not be suited to the ‘new normal’. For example, they: 

  • have a high level, medium-term outlook and often lack the granularity or functionality to support short term cash flow forecasting and management;
  • can be rigid and inflexible in structure;
  • are not always designed to readily and robustly incorporate changes in the fast-moving current environment (e.g. furlough, the CBIL scheme, or extreme operational and cash flow assumptions); and
  • may lack the ability to conduct the type of sensitivity and scenario analysis that is relevant right now.

Further complicating the picture is the expectation that businesses may need to provide lenders with both short term weekly cash forecasting (which support and quantify short term peak needs and act as a practical cash management tool) and medium term forecasts (to show how they trade out of the current situation and repay emergency funding).

The key question to ask is 'can my forecast model reflect my current situation, and is it good enough for lenders and investors?'.

A few models may cope with both requirements, and some existing medium-term models may be adaptable to include a spur or ‘memorandum’ short term cash flow calculation. In practice though many businesses will need to develop a separate tactical short-term cash flow forecast. This may be little more than a schedule of expected receipt and payments from the current balance sheet, along with the anticipated near-term trading cash inflows and costs mapped along a weekly timeline, typically looking 13 weeks out. Sophistication is secondary here, with simplicity and transparency being key.

Forecast checklist

To help you think about fitness for purpose and understand what you may need from your forecasting models in the face of the current crisis, we have prepared a simple checklist. This checklist includes some simple questions you should be asking of your forecasting / decisions making tools and finance team. It’s not exhaustive and not all of the questions will be relevant in every case but we hope you find them helpful as a prompt.

Questions to consider: can your model(s)...
1 Support weekly cash forecasting for the next quarter?*
2 Incorporate inputs at the required level of detail?*
3 Be readily updated to rollover the start date for the forecast period or update for actual financial performance over time to provide timely information?
4 Give ready line of sight to underlying accounting records to help bridge historic figures?
5 Be updated straightforwardly and quickly with separate and transparent inputs and assumptions?
6 Provide a clear, understandable presentation of relevant and business critical financial results?
7 Address lenders' needs for information, covenant and KPI reporting?
8 Be easily extended to cope with additional debt facilities or to add new workings for Government grant or loan guarantee support (such as CBILS)?

9

Provide flexibility to easily adjust existing workings where the calculation basis has changed as a result of the measures being introduced (eg furlough)?
10 Adapt to cope with extreme and/or volatile assumptions and allow accurate modelling of working capital?
11 Provide flexibility to conduct rapid and accurate sensitivity/scenario analysis?
12 Allow for the unwind of opening balance sheet and incorporate manual adjustments without impacting the integrity of the model?
13 Be amended and updated in a risk managed manner without undermining its logical integrity and structure?

*Note that if the answer to the first two questions is ‘no’, then it is likely that you will need to develop additional short-term cash flow forecasting analysis.

In conclusion

Popular tradition in the UK suggests there is a Kingly prerogative for the consumption of swans; in this case the swan seems to have the upper hand for now. In the teeth of this crisis, a robust financial model can help you get back on top of your cash flow and emerge from this crisis with your kingdom intact.

For more details on some of the Government measures to support business and employment, which will need to be considered in your modelling, or for questions around coronavirus generally, please visit our coronavirus hub.

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