March 2020 - The IFT

Liquidity – a lesson from past crises by David Tilston

David Tilston, listed company CFO and IFT member, shares his insights on a liquidity key lesson at times of crisis: build a rolling cashflow.

I have dealt with a number of liquidity situations in the past, ranging from the severe to the potentially terminal. I pass on one useful lesson I have learnt.

The lesson

Get a 13 week rolling cashflow forecast started as soon as possible, ideally this week, and update it weekly.

What is a 13 week rolling cashflow forecast?

It is a forecast which starts from a confirmed cash position (normally at the end of the prior week) and forecasts your cash balance at the end of each of the next 13 weeks. It is based on explicit assumptions around the cash receipts (normally from customers) you expect to receive, and the cash payments (including salaries, supplier invoices) you expect to make.

Why is it important?

It gives you a forward looking view as to your liquidity and whether you are in danger of running out of cash in the short term. If you are, then at least you can see when and decide what actions you need to take.

If you want to seek help from your lenders then you will be asked to produce a 13 week rolling cashflow forecast, and they may ask an external firm to review it. If you cannot produce such a forecast, then your lenders will have less confidence in the company being able to manage its liquidity position. In addition, it will give the lenders some perspective on how quickly they need to act and the potential amounts they might need to lend in the short term (possibly whilst a longer term solution is being worked on). If you are asking the lender to put in a large amount of cash next week, they may withdraw their support. The longer the notice period to the lenders, the more opportunity they have to potentially be supportive.

Some typical responses and how to deal with them

“We do not have time to do this” – It is much better to have a blunt forward-looking view of cashflows rather than a detailed backwards-looking analysis of performance, as the latter does not help you take the requisite cash preservation decisions in time. If you are not forecasting cashflows then you are not going to see with clarity an emerging problem which may be approaching rapidly, and this will not be good for credibility with your lenders should you have to speak to them.

“The forecast will be wrong” – this is absolutely correct as some assumptions and all forecasts will be wrong. However, the more you do it the better you will get at it.

“Why do I need to update it weekly?” – Firstly, so you can reconcile your week 1 forecast to the actual outturn 7 days later and understand where your forecasts were wrong (and therefore how to improve them). Secondly, you want to understand how your forecasts are evolving over time, and this is most easily done by graphing several of the forecasts on a weekly basis (as shown in the graph below). If the forecasts are generally consistent over a number of weeks and you project closing cash balances within a reasonable tolerance, then you can have greater confidence in your forecasting ability. If forecasts are continually ahead of reality and being downgraded (as shown in the graph) then that is probably a warning sign your assumptions are too optimistic.


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Handwashing and Beyond: Key Turnaround Advice for Businesses Under Stress

The impact of coronavirus is already exacerbating existing challenges for businesses in the UK. In the context of increased strain, we are sharing the key turnaround insights as you implement measures in your business to deal with coronavirus.

Knowledge and Planning

Understand your position and keep doing so, to aid your planning and management and to help your stakeholders have confidence, “a well-constructed forward looking report focusing on the key KPIs: sales, orders, cash, debts and profit will help with decision making and any difficult conversations. Management should be thinking about actions they can take to mitigate shortfalls and pinch points in the short-term cash flow”, says Ian Parker, Independent Turnaround Professional.

Once you have this forward-looking view, it is important to also ensure it is agile to deal with rapidly changing circumstances:

“It’s important to identify the planning assumption with the greatest uncertainty around them and then develop multiple scenarios for each.  This won’t give you a ‘crystal ball’ but it will greatly increase the resilience of your plans.”, adds Kelly Jones, IFT corporate partner Kingsgate.

Stakeholder confidence

Trust levels can naturally become affected at times of stress. Identify and manage stakeholder expectations – lenders, funders, shareholders, customers, suppliers and your workforce. Engage early and consistently to ensure confidence and trust.

In addition to providing the basis for contingency planning, trusted information and trusted relationships go hand in hand:

Open and honest discussions should be had as early as possible. It’s generally in lenders’ interests to be supportive, but they will need to have confidence in the management information and the management team.” says Philip Watkins, Restructuring Advisory Partner, FRP.

It is essential that the leadership grasps the issues and motivation from the top to the bottom of the business. From engagement in hygiene measures to steps you may need to take to temporarily remodel or scale back operations, your colleagues need to know how they can get involved and how they will be affected.

Cash Flow

The life blood of any business is cash. Take a long hard look at your regular and discretionary expenditure”, says Ian Parker. Running out of cash is often the trigger point for a crisis.  Fixing the finances is not a cure in itself, but it does provide the time and space to manage wider issues.

Cash collection remains crucial whilst recognising that customers and suppliers will likely be facing similar challenges. “It is even more essential in these testing times that robust cashflow forecasting is in place”, says Nina Warwick, Independent Turnaround Professional.

Supply Chain Disruption

A key part of your contingency planning will be managing your supply chains, including clarity on where essential materials and components come from: “Large multi-nationals supplying key components may have multiple facilities, but key components can cause serious disruption”; local suppliers are important too and have different issues “this group is usually under-capitalised and reliant on short term finance and overdrafts” however, the government’s recent measures to refund 14 days sick pay for SMEs with fewer than 250 employees will ease cash flow for some suppliers.

Adapting your Operating Model

Every business will be considering how to do things differently, but many businesses cannot use home working as an option. The need for reduced working may coincide with staff illness and isolation, and businesses should be making maximum use of government measures, such as refunding sick pay for businesses with fewer than 250 employees. Consider how to ‘right size’ your businesses to match reduced demand.

Ensuring a continuity of workforce is key.  Some companies are changing work patterns and others have implemented home working.  Independent member Philip Smith says “Don’t forget the management! Change how they work to ensure the brain of the business is not suddenly disabled.  You should even consider keeping some people away to act as substitutes if key management become unwell or are unable to work.”  

Long-term strategy

Where there are ongoing and underlying issues, for a turnaround to take place, a re-growth strategy needs to be put in place. That means finding a way to do things better, cheaper or differently than your competitors, and having a vision that can be turned into a long-term recovery plan.

Work out what sets you apart from your competitors:

What is different about how you do business?

What is different about how you value your clients and why they would work with you?

What is your Unique Selling Point?”, advises Nina Warwick.

Coronavirus will continue to test resilience for the immediate future but, with structured planning and a short – and medium – term view, it needn’t prove the end of the road for the UK’s stressed businesses” – Philip Watkins of FRP.

In summary, the key issues to consider are:

  1. Take stock of the situation and regularly evaluate.
  2. Maintain or increase the communications flow to key stakeholder.
  3. Closely manage your cash flow as it’s the lifeblood of the business.
  4. Ensure your supply chain is resilient and have a contingency plan.
  5. Adapt your operating model including how senior management work.
  6. Think about the long-term position and start to put a strategy in place.

The IFT is the key organisation in the UK for professionals advising stressed and distressed businesses on business recovery. We champion turnaround excellence.