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Preparing a short-term cash flow forecast is a practical step businesses can take to manage liquidity issues in the current environment, the mid-tier firm says.
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Cash flow forecasting critical in unprecedented environment: BDO
03 August 2023
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Businesses may need to rethink how they forecast and plan for their future with many businesses dealing with “unprecedented levels of change”, according to BDO national leader, business restructuring Andrew Sallway.
For businesses struggling to rebuild after the pandemic, Mr Sallway said reliable and robust forecasting has never been more critical.
One of the way businesses can achieve this is through a short-term cash flow forecast which looks at the incoming and outgoing cash flows, either daily or weekly over 13 weeks.
“It is a critical planning tool for assessing your cash position and understanding whether your business can operate within available cash resources,” said Mr Sallway.
“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.”
Mr Sallway said there are number of areas businesses can focus on to get their cash flow and business back on track.
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“To ensure a steady cash flow for your business, consider having conversations with your customers about the option of early or staged payments,” he said.
“Leveraging your commercial relationship with certain customers can be a strategic approach to hasten receipts and improve cash flow.”
Businesses could also 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,” said Mr Sallway.
In order to conserve cash, businesses should also 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,” said Mr Sallway.
“By taking a proactive approach to cost management, businesses can ensure they have the necessary resources to weather any financial challenges.”
If the business has tax arrears that is 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,” said Mr Sallway.
Inventory can be a significant element of a business’s working capital and 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,” he said.
In a challenging situation, Mr Sallway said he recommends that 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,” he said.
If businesses are still unable to alleviate their 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,” said Mr Sallway.
“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.”
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