What's everyone else doing?
This is another newsletter in a series we are sending out via email to people we know, to share some of the things other clients have been benefiting from.
CASHFLOW FORECASTING
This issue is about cashflow forecasting - a critical subect in these challenging times. You may be aware that your overdraft is growing, or you may have been contacted by the bank looking for some confirmation that you know how big a facility you are going to need. We give you an example of what we have done recently for a client - and the feedback it has received.
Background
The client, a professional services firm near Birmingham, is seeing a tougher environment for cash management - even though they are arguably their most profitable for years. There are a number of factors outside their control, but the bank is looking for some reassurance that they are managing the situation well.
The CBSL Project
This firm, like many, already had a form of cashflow forecast in place - but we frequently find organisations that haven't even got this far. However, in common with many others, it wasn't being used as a serious monthly management tool - not being updated regularly and not being checked against actual performance to explain variances and refine the tool. Also actions were rarely taken as a result of the forecasts.
The CBSL team, made up of consultants and accountants, built a simple spreadsheet-based tool, but rigorously tested it. Sometimes we use proprietary forecasting software (such as Sage WinForecast), but find this isn't always well understood by the internal finance teams, so this time we used Excel. We used historical results to simulate the forecast accuracy, and improved it before it even went live - learning to explain the variances from forecast to actual and then build them in to the tool.
The most important step then, is to make sure it is properly reviewed and actions taken where necessary. This was done by including a review in the main monthly senior management meeting - and in some cases devoting a whole meeting to understanding the forecast and the required actions.
Things to remember when forecasting cash
This isn't an exhaustive list, but we've included some of the main things you might want to remember when forecasting the cash position:
Sales forecasting - a black art perhaps, but be aware of best and worst case assumptions. Do you run a 'PSI' (Production/Sales/Inventory) style of report to track forecast accuracy? Do you adjust monthly sales forecasts based on under/over performance in recent months?
VAT - don't forget payments received will include VAT, but you will also have to 'reserve' the VAT ready for your payment date. Consider a separate account for this. Remember too that purchases have VAT on, and you have to decide how to treat that in the forecast.
Payment profile - you may already be aware of what percentage of your invoices get paid in how many days - but when did you last verify these assumptions? Also, have you allowed for a percentage of bad debt?
Cash and non-cash P&L items - you can't just use the Profit and Loss to forecast cash as not all items on it relate to cash movements (such as depreciation), and there are other cash-items not on the P&L (capital investment, principle loan repayments and (depending on the format) dividends etc.)
Unpresented cheques - often ignored but if there are big movements it can really throw out your forecast accuracy.
Movements in debtors (which are really variations to the payment profile assumptions) and creditors (holding back that BACS run?). Are you including actual purchasing spend - or a Cost of Sales figure with stock movements? How well can you forecast this?
There are several other pitfalls and areas to be careful of - this is a basic list to get you started.
The Result
There have been two main benefits - one direct and one indirect.Firstly, the senior managers have realised that even with good profitability they can still have a cash problem - especially due to seasonal variations. This has led to some actions being taken which have prevented a breach of their overdraft facility.
Secondly, they have shared it with their bank and have had very good feedback. If they need an extended facility in the future, they are more likely to get it if the bank knows they did everything else first before running to them.
What Their Bank said about it
"This is the most detailed cashflow forecast I have ever seen!"
Chris Chalk, Barclays Bank Relationship Director
How to find out more
If you'd like to get more information on CBSL's work - cash management, or on any area of profitable business growth, business turn-around or strategy and succession planning - then call or email us now. We'd be more than happy to come and have a chat.
And because we mainly work with fixed monthly fee arrangements and even then only when we are convinced it is worth it for you as well as us, you don't have to worry about it costing you just by talking to us. See below for our "free half-day of consulting" offer.
What else does CBSL do?
You may already know a bit about us, or this may be new to you. Here's what else we do:
- Outsourced Management Accounting
- Registered Auditors and Accountants
- Profit Improvement & Strategy Consulting
- People Selection and Management Consulting
- Telemarketing Support
Thank you for taking the time to read this newsletter, we hope you found it interesting. If you would like to find out more about who CBSL Group are and how we could help make your business more profitable please vist our website www.cbslgroup.com.
