Rutherford Cross recently hosted a webinar with KPMG titled ‘Navigating the Way Ahead’, focused on the highly topical subjects of effective cashflow, working capital, and funding. We were fortunate to be joined by both Alan Flower and Stuart Dougal from KPMG, and Alan Anderson from TSF Finance to give their views on the importance of centering on these three key areas.
The session proved highlight informative, taking the audience through the importance of focusing on cashflow, the pitfalls, right through to what lenders are looking for. Below we share some key takeaways from the session.
Why Focus on Cashflow?
The pandemic has caused huge financial pressures and while currently insolvencies are down YOY, there is more debt on the balance sheet and working capital requirements are increasing as activity levels rise. Lenders want to know a business is controlling their cash effectively before they will lend.
Common Cashflow Pitfalls
Many businesses have not experienced cash pressures before and are not properly set up to deal with them. Some businesses until now have not had to manage cash stringently. Cash management is more than just collecting overdue debtors and slowing the payment of suppliers and is relevant to everyone from small companies to large corporates.
Typically, cash forecasts have insufficient detail and granularity, however it is important to get the balance right, managing time spent versus the benefit of increasing levels of information provided. The benefits of creating a forecast are only realised when it is monitored closely. Long-term forecasting helps with strategic cash management, a rolling 13-week cashflow forecast can help with operational cash management and identify imminent liquidity issues.
Where Do you Start?
Forecasting should be a consistent activity with appropriate level of detail. To improve liquidity, you should try and identify a series of marginal gains In KPMG’s experience on average businesses can achieve a sustainable cash improvement of 5% of revenue.
Drivers influencing cash flows include invoicing timing, credit terms, payment run timing, capital expenditure, tax, pensions. Timing can also have an impact such as paying only when invoice is due rather than ahead of time which is surprisingly common. Managing stock levels appropriately can also have a significant impact on cashflow.
How to Keep it Sustainable
Just as revenue in the business is not solely the finance team’s responsibility then cashflow shouldn’t be either. Spread the responsibility to other parts of the business and if required be prepared to work across the business to deliver a cultural change around cashflow management.
What does a Lender want to See?
A detailed cashflow forecast along with forecasted sales is essential. A lender will drill into the sales pipeline and will look at signed contracts and confirmed orders. There will be a focus on margins and overheads, customer credit limits and credit insurance. The lender will assess if you can service the debt if a second full lockdown comes into force.
Know your numbers, your P&L, cashflow and sales pipeline, and for debt of between £5m-£10m get your advisor to join you. Securing Credit Insurance could also prove a real challenge.
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