COVID-19: nine principles for finance professionals - adapting cash flow processes, analysis and forecasting
16 April 2020 - The business impact of coronavirus (COVID-19) means effective cash flow analysis and forecasting have never been more important. This guide sets out some principles for adapting your approach to the current crisis.
Note: these principles do not cover how to get cash flowing into your business or how to access government support for coronavirus business disruption – see our guides COVID-19: Six actions for finance professionals on cash flow and The financial management implications of coronavirus.
The nine principles
Principle 1: CEOs should take overall responsibility for cash management if there is a risk of business failure
- Decisions around cash will be fundamental to both short-term survival and the long-term viability of the business.
- Effective cash management requires communication and co-ordination across all departments.
- Obtaining cash from customers may need conversations at senior levels to overcome roadblocks, and to balance the need to get cash in quickly while maintaining customer goodwill.
- Similarly maintaining relationships with key suppliers needs to balance difficulties in paying them while maintaining the supplies essential to keep the business going.
- Employee morale and their ability to do their jobs will be impacted by cash management decisions.
- Lenders will want confidence that the CEO is on top of all cash related matters.
- The CEO needs to ensure consistent messages throughout the organisation and with stakeholders.
- The CEO needs to decide whether the business is viable.
- Group CEOs need to co-ordinate across all group entities to ensure the optimal use of cash and credit facilities.
Principle 2: Ensure responsibilities, reporting lines and staff cover for all cash related matters are clearly understood throughout the organisation
These will include:
- Communication with customers, suppliers, tax authorities, insurers and lenders. With escalation routes for when there are issues.
- Payment and expense authorisation levels, which may now need to be set at higher seniority levels.
- Maintaining cash controls such as bank reconciliations, credit checks and employee expenses.
- Monitoring details of government support and how such support changes day to day.
Principle 3: Set up regular cash meetings involving those with insight on predicted cash movements
- Effective chairing is key to ensure focus, realistic action plans and clear assignment of responsibilities.
- The right people could extend from the CEO to the accounts receivable supervisor.
- Frequency depends on level of concern but should be weekly at minimum.
- Document knowledge gained and key action points with responsibilities.
Principle 4: Build up forecasting effectiveness by combining business experience with the best available evidence and improving forecasting processes. NB human biases need to be managed.
- The better the cash flow forecast the greater the chance of managing through the crisis and the greater the organisation’s credibility in engaging with stakeholders.
- Determine forecast horizons relevant for your business and level of detail for each e.g. immediate survival, emergence from crisis and new normal.
- Draw on your best people to develop forecasts – research suggest those with training in probability and scenarios outperform others with similar experience.
- Develop information gathering processes such as intelligence from all stakeholders, news scanning and insights from social media.
- However, weigh information carefully, considering:
- sources and whether the information comes from more than one independent source;
- anecdote versus statistics; and,
- Be objective, use professional scepticism and confront the facts.
- Avoid confirmation bias – this is where people seek out information to confirm existing beliefs and ignore other relevant information.
- Produce relevant scenarios including worst case, most likely case and best case. Include predictions of earliest date additional funding may be required.
- Ensure scenarios add value as ways of generating ideas and improving response times.
- Fan charts are a useful way of visualising the increased uncertainty around cashflows as forecasts extend further into the future.
- Assess accuracy of forecasts against actuals in order to improve processes.
Principle 5: Design cash flow reports to support critical business decisions and funding applications; therefore, they should be understandable by non-accountants
- Cash flow forecasts are fundamental to determining whether the business can continue in its current form or whether more radical solutions, such as turnaround or insolvency, are necessary
- Lenders will require cash flow forecasts as part of loan applications and ongoing monitoring, usually for the next 12 months.
- Use the direct method where possible, showing cash inflows and outflows. (The indirect method which reconciles cash to the profit and loss statement is less easily understood, although it is a useful control).
- Show cash at start of period (current account and savings accounts only), cash out and cash in, leaving a surplus or short fall.
- Show how surplus or shortfall will be managed e.g. headroom on existing facilities, obtaining increased overdraft, additional loans, sale of investments.
- Use descriptions easily understood by non-financial managers - avoid accounting jargon.
- Clearly document assumptions eg Major customer X will pay Y on date Z, with a probability of P.
Principle 6: Maintain controls over cash flow reporting
- Reconcile cash flow reports to bank statements and creditor statements and quickly chase down discrepancies.
- Show date and time prepared.
- Ensure reports are reviewed by someone other than the preparer.
- Clearly identify preparer and reviewer.
- Reconcile cash flow statements to profit and loss and balance sheet movements.
- Increase frequency and rigour of balance sheet reconciliations and substantiation to validate cash flow forecasts.
- Check consistency with other management information eg, income pipelines.
- Changes in processes and the implementation of business continuity and contingency plans may impact record keeping, cash controls and the nature of cash movements.
Principle 7: Increase frequency of reporting and consider whether to report on monthly, weekly or daily cash movements
- Rolling, detailed, weekly cash flow forecasts for 13 weeks out are often used in turnarounds and may be required for loan applications.
- Rolling, monthly cash flow for next 12 months are usually necessary and again will be required for loan applications.
- Look further ahead if there are known, large payments due, e.g. loan repayments.
- Identify process improvements to increase speed of production and accuracy of reports.
- ‘Mothballed’ businesses may have reduced reporting needs but still need to be planning for when business can restart.
Principle 8: Maintain underlying data in as much detail as possible – this enables maximum flexibility in reporting
- Make the most of accounting systems – check to see whether relevant functionality is already available or whether add-on modules and apps can be obtained.
- If necessary, develop a spreadsheet listing or database of material forecast cash movements to support summarised cash flow reports. Analysing debtors is particularly important. For each item:
- Assign expected, worst case and best-case dates for receipts and payments.
- Show maximum, expected and minimum amounts to take account of disputes and retentions.
- Assign probabilities to likelihood of collection for outstanding debts and success of financing applications.
- Show responsibilities for collection.
- Record notes on assumptions, risks, feedback obtained from third parties and market insight.
Principle 9: Follow ICAEW’s Twenty Spreadsheet Principles when developing cash flow reports and forecasts
- Spreadsheets are highly prone to errors, especially when put together while under stress.
- Principles include, but are not limited to, independent review; separating out inputs, workings and outputs; short and simple formulae; performing calculations only once; rigorous testing; built-in checks and alerts, and systematic backup and version control.
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