Ken Pattullo: Cash is king - protecting and understanding your cash during times of uncertainty

Ken Pattullo, regional managing partner at Begbies Traynor, discusses the importance of cash and how to protect it in times of uncertainty. 

Ken Pattullo: Cash is king - protecting and understanding your cash during times of uncertainty

Ken Pattullo

Cash flow is the lifeblood of any business, and certainly in the short term more important than profitability. The money coming into your business ensures you can cover payments to suppliers and employees, as well as maintaining other operational overheads. While adequately managing your company’s cash flow is a critical part of running a business, in the current climate, it is arguably of more importance now than ever before. 

Good cash flow management practices enable you to forecast your cash balances ahead of time, ensuring you have sufficient liquidity to pay your bills when they fall due, while also ensuring sufficient reserves are available to deal with those times when income does not arrive as you would expect. When cash flow suddenly grinds to a halt it poses challenges even during favourable trading conditions, but when this happens during trying times it is particularly concerning.

Being on the receiving side of late or non-payment from creditors is an unavoidable risk within business, but in this rapidly changing and increasingly challenging landscape it is now more likely than ever that you will encounter creditors who fall behind in their obligations to your company.

While late payments are more common within certain sectors, many other businesses will be unused to managing their cash flow under such uncertain conditions. Normally reliable creditors could now find themselves simply unable to pay you and others as they once did, causing a domino effect which can cascade down the supply chain to devastating effect.

Protecting your company and understanding its cash flow

We often see businesses experiencing financial difficulties due to not having a robust cash forecasting process in place. In the majority of cases, an immediate improvement can typically be seen following the implementation of a rolling 13-week cash flow forecast, which can quickly highlight any liquidity pinch points, thus allowing for a robust strategy to be implemented, to overcome these possible shortfalls.

An initial forecast can be swiftly constructed through an assessment of the company’s most recent bank statements and other transactional records. This will then be extrapolated forward before being finessed further through careful monitoring of actual cash flow against these forecasted figures. 

This will be refined further through a process of resolving and understanding variances and obtaining input from across the business, particularly from key areas such as the sales, finance, and procurement teams.  
The earlier you know about your company’s liquidity pinch points, including understanding the likelihood of actually running out of funds, the more time you have to do something about it. This is where a process of sensitivity analysis comes in. Also known as ‘what-if’ analysis, it seeks to answer what will happen to certain dependent variables when various parameters change.

We will pose various possible scenarios and stress test your business and its current practices. The end result will be to provide answers, as well as a carefully devised strategy, to your most pressing business concerns, including:

  • What happens if that big payment doesn’t come in?
  • How will the business cope should an expected order not materialise?
  • What if costs on a project escalate or it overruns due to staffing and/or material sourcing issues? 
  • What is the point at which there is a risk in terms of your ability to make payments when due? 

Mitigating the risk to your business

By putting a plan in place ahead of time you are helping to mitigate the risk to your business in the face of these unprecedented challenges. Should the worst happen, you will be working with a carefully formulated strategy, devised ahead of time, and designed to withstand sudden shocks to your cash flow and trading conditions.

When testing times reign and uncertainty is the only real certainty we have, it is more important than ever to ensure your company is in the best position possible to weather the potential storms which lie ahead.  With almost daily announcements from the Government about funding and support available to help business deal with current challenges, it is important to ensure that all available options are quickly explored and assessed, particularly when the very survival of the business might be on the line.

Begbies Traynor Group is on hand and ready to help with cash flow management issues, strategies to improve working capital, as well as sourcing funding to help you deal with the challenges that may arise in the current climate.   

While you may not be able to control what is happening within the wider environment, you can control your actions and how you position your company to be able to withstand whatever the future may hold in the face of prevailing uncertainty. 

Read all of our articles relating to COVID-19 here.

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