The COVID-19 pandemic is as unprecedented medically as it is financially. Never before has there been a period in which all business have had to collectively look at their liquidity and assess the short-term future in such a critical manner. Such situations are typically reserved for discrete business models, niches or geographies. For every single business to contemplate how to survive in the midst of revenue losses ranging from 10 percent to 100 percent brings a skill set to the forefront more so than ever: short-term cash flow forecasting under a crisis situation. Furthermore, there may be waves of economic revival and retreat, as the virus and other events spread and then retreat. Therefore, businesses should approach the management of the crisis, and their cash flow, as likely to move in different directions as it unfolds over time. No one can say that the path to recovery will move in a certain direction or be without bumps in the road.

There are many nuances to preparing a cash flow forecast and for interpreting the results and taking action on what it shows. In this blog, key tools and thought areas are presented, along with best practices for preparing and maintaining a cash-flow model.

Key Themes

• Data-driven Decisions: Managing through a crisis is unprecedented for many business and owners, both in terms of the specific challenges brought by the COVID-19 pandemic and also the need to manage cash under a much brighter spotlight than likely ever before. Couple this with many business owners whose life’s work is represented by the company they have built over years and decades, and it becomes critically important to separate the emotional component of making cash flow decisions compared to letting the data guide the decisions that best serve the business in the short and medium term.
• No Longer Managing P&L: Managing cash is now the focus. Managing sales, margin or the bottom line is no longer the goal in a short-term liquidity crunch. Keeping one eye on key business metrics is important, but if a company is performing a 13-week cash flow forecast, then that tool should be one of the, if not the absolute, primary management tools (i.e., do not focus on securing a sale that will not settle for 30, 45 or even 60 days when a covenant breach or cash-shortfall crunch may happen before then). This requires a change in corporate mindset and must be adopted across an organization in order to navigate cash shortages.
• Identify and Manage Cash Crunch: The objective of the short-term cash flow forecast is to find the cash low point and drive decision making and action to mitigate any shortfall. Identifying the drivers of a cash low point is important but even more so is management’s ability to make decisions based on the results. There will be some degree of “wack-a-mole” whereby solving one cash low point creates another. However, an overall reduction or even eradication of a cash shortfall can be achieved by following best practices and taking an active, on-going approach to cash management.
• Short Term vs. Medium Term: When looking at cost rationalization it is important to keep an eye on the medium term and consider any changes to the underlying business model that may be warranted in light of new social and economic norms. For example, if rationalizing payroll, there may remain value in longer-term, strategically important employees, even if they are not necessarily productive today. Additionally, some employees may not have a role in a revisited business model in the “new normal” that the economy will regrow into, even if they have been star performers previously.
• Cost Rationalization: Many business will have specific cash flows that can be immediately revisited, and many vendors/suppliers will be expecting some sort of renegotiation. Typically conversations would include:
  • Leases: Key payment and pricing terms
  • Receivables: Early payment discounts/late penalties
  • Payables: Ability to increase terms and/or compare with competitors terms
  • Expense policies: Essential versus non-essential
  • Debt restructuring: Capital repayment deferral, while still servicing interest payments
  • Payroll: Review staffing levels and rates

It is worth noting that no vendor wants to be the first call or the sole source of assisting through a cash crunch – so the ability to demonstrate or discuss other initiatives being pursued will be helpful in opening up the conversation. Equally, the need for multiple vendors’ assistance in managing cash is important to achieve a balanced and reliable outlook. In that respect, being open and communicative with stakeholders is critical, to avoid surprises for both parties and to increase collaboration to a successful outcome.

Equally, new costs will emerge and should be incorporated (such as protective equipment, deep cleaning, virus testing and others). Similarly, historical costs may increase, such as cyber protection measures in light of remote working and insurance costs. These will need to be considered as the economy begins to reopen.

Best Practices

Below are a number of best-practice considerations when developing and refining cash flow forecasts:

• 13 Weeks: A cash-flow forecast will typically look forward at least 13 weeks in order to capture any quarterly receipts or payments that could be lingering on the outskirts of some other period. The timeframe is specified as 13 weeks and not three months because a weekly forecast is the appropriate level of granularity required. A monthly view simply does not have enough detail to identify cash low points and to give management enough time to take corrective action.
• Keep Rolling: Good cash-flow forecasts involve rolling the forecast forward every week. This provides an opportunity to incorporate the latest available information, such as late-paying vendors, new sales, etc. Many forecasting processes use a forecast that is set in stone at the start and then used to measure performance thereafter, with the argument being that continually reforecasting gives no insight into how accurate the original forecast was. However, for managing short-term liquidity and associated urgency, this thought process is less relevant – the focus is on seeing what is coming and taking action to mitigate; whether it can be seen in the prior version is less relevant.
• Be Conservative: A cash-flow tool should paint a worst-case scenario. The intent is to provide management with foresight in making decisions, not to aim for 99.9 percent accuracy. Taking a conservative position will minimize surprises and reduce downside risk. If reality turns out better, that is a welcome upside, but forecasts should not avoid the worst-case scenario for fear of what it may look like. As the economy reopens, operating costs may be required to be incurred before revenue growth. Many companies may have depleted their working capital and will need to invest in rebuilding back to sufficient levels.
• Model Scenarios to Avoid Surprises: Modeling scenarios for how different events may unfold and the associated cash impact is important not only for management but also for external stakeholders such as landlords, lenders and others. Having readily available data on the implications of critical events provides management with additional time to think through decisions, provides the ability to be nimble and avoids potential surprises to external partners with little time to react. Transparency – both internally and externally – is key. As various avenues are pursued to provide liquidity, it is important to ask “what if?” What if all sources were successful? What if none? What it some but at different points in time? The answers will uniquely change the cash profile and, with it, the decisions that need to be addressed and when. Understanding a range of outcomes will therefore arm businesses with the appropriate conversation topics that need to be addressed with their stakeholders. A well-built cash flow model will simply need a few toggles to paint a new picture in light of new information – building a model that allows dynamic changes is critical in this regard and should not require significant time investment as new information becomes available. Such scenarios may include receivables being stretched, price changes, renegotiated vendor terms, asset disposals, loan funding and covenant trips, staffing changes, PPP forgiveness and many others.

If you have any questions on the above, GHJ’s COVID-19 Response Team has as an experienced team of consultants specializing in COVID-related laws and programs and can provide the tools your business needs to help it recover from this business disruption. We are here to assist organizations to succeed in these very challenging times.