CONFRONTING A CASH FLOW CRISIS

Alan Morris, Director, Cash Management, KPMG

Turnover is vanity, profit is sanity, but Cash is King, writes Alan Morris

Are you spending too much time fighting off suppliers chasing for payment? Or spending too much time chasing customers for payment, offering ever increasing discounts for prompt settlement? Do you have repeated late payment of tax liabilities, or concern over where the money will come from to meet the next payroll run? Such problems are faced by many business managers every day and may signal a cash flow crisis ahead.

There are many causes of a cash flow crisis, including operating losses, poor financial controls, an over-burdensome financing structure, and overtrading. However, the purpose of this article is not to dwell on the causes, but instead to provide some guidance on what business managers should do if they find themselves facing such issues.

Act Early And Decisively

When a cash crisis looms, there is little time to waste on looking back. Positive action is what’s required. It is imperative for managers to act quickly, and decisively, to address the situation. Failure to do so will invariably lead to mounting problems, and sadly, for some businesses, will ultimately result in insolvency. When cash flow problems arise, there are some key steps management must take without delay.

Firstly, you will need to establish the current cash position. This will require identification of all bank accounts and facilities and the level of cash available to the business.

You should then prepare a cash flow forecast to include all receipts and payments. This will require a detailed understanding of the flows of cash into and out of the business, and should be prepared with input from all relevant staff within the business. The cash flow forecast should normally be prepared on a weekly basis and cover a rolling thirteen week period, although this may vary depending on the nature of the business. A daily forecast may be required initially to allow a proper understanding of the cash flow, particularly in businesses such as retail, where cash flows may fluctuate significantly from one day to the next.

If the business hasn’t already done so, control of cash, both receipts and payments, and the forecasting process should be centralised. This will enable management to identify the critical cash flows and prioritise and schedule payments on a daily basis. Authorisation for cash expenditure should be increased and potential sources of leakage, such as credit and purchasing cards, should be cancelled unless absolutely essential for the short term operation of the business.

Having prepared your short term cash flow forecast, it should be rolled forward regularly, with careful scrutiny given to understanding the reasons for variances from forecast. All valid variances should then be reflected in your revised forecasts. The cash flow forecast will provide a clear view of the cash position in the short term, which in a cash crisis is the critical period to focus on. It will highlight peaks and troughs, and the requirement for any additional funds.

By taking these immediate actions, management will be able to identify the key sources and uses of cash within the business. This will enable an assessment of the adequacy of the various inflows to meet the outflows, and should also enable management to identify the main areas where cash is leaking from the business.

Look For Opportunities To Generate Cash

The next stage in the management of the crisis is to identify how extra cash can be generated. This may come from normal trading activities or from elsewhere. Management should review the working capital cycle and take actions to reduce the amount of cash tied up in the business. Cash might be freed by chasing outstanding debtors harder, by reducing terms of credit for new sales, by negotiating longer terms of trade with suppliers, or by reducing stock levels. Other quick sources of cash might include the disposal of surplus assets or the raising of additional finance.

Seek Professional Assistance

Dealing with a cash crisis can be a daunting task, and one for which managers are not trained. If your house is burning down, you call the fire brigade because they have the equipment, resources and know-how to deal with such a crisis. The same applies in business – you will need professional help. If you have any concerns about the prospects for the business surviving you should also seek professional advice to protect your personal position in the event that the business is, or becomes, insolvent.

Cash Is King

By establishing the current cash position, centralising and strengthening controls over cash, and preparing detailed cash flow forecasts, management will be in a strong position to deal with a cash flow crisis. And by acting swiftly, and with appropriate support, management will not only increase the chances of turning the business around, but will also stand a much greater chance of gaining the support of the bank, other lenders and stakeholders throughout the recovery process. While turnover and profits are often seen as the holy grail of business, there is no truer mantra than cash is king.