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Cash Flow Management: More Vital Than Ever to Your Organization

During the COVID-19 pandemic, many organizations have seen a shift in focus from net income to net cash flows. Keeping your finger on the pulse of your cash flow needs is more important than ever due to uncertain economic conditions affecting both customers and vendors. Two critical areas where organizations can focus to ensure cash flow needs are met are cash flow modeling and the management of payables.

Cash Flow Modeling

Developing a cash flow model is an extremely helpful tool in managing future cash positions. An ideal timeframe for a rolling cash flow projection is between three to twelve months. Beyond this time frame, you may be dealing with factors and assumptions that are too difficult to accurately estimate. Consider using simpler calculations to forecast beyond this timeframe.

Staring at a blank Excel screen trying to picture what your model should look like is a daunting task. You may have endless sources of data or assumptions flying around in your head. Start simple and build up over time, as one could easily spend weeks on a model that ends up having no useful value besides aesthetics. Collaboration between divisions in your organization is also key, as sales, procurement, operations, human resources, marketing, and information technology divisions can offer valuable insight into cash flow needs and anticipated changes in your business.

Another important consideration is the flexibility of your cash flow forecasting model. A rigid forecast that cannot be tweaked for “what-if” scenarios is not as valuable as a model that can be easily modified to different assumptions that stakeholders may want to explore. The more dynamic you can build your “what-if” simulator, the more hypothetical outcomes you can project in your cash flow model. For example, consider the effects of the following on your model and how you may run hypothetical scenarios to account for them:

  • Potential reductions in sales volume due to changing customer circumstances.
  • Slowing of receivable collections.
  • Closure of key customers or suppliers.
  • Supplier delays or shipping failures.
  • Further government mandated shutdowns.

A cash flow forecast is only as good as its underlying assumptions, as well as the data it's being fed. It’s one thing to design a beautiful cash flow model complete with perfect color coordination, fancy charts and graphs, and equations so complex that you’d elicit nods of approval from even the most hardened of Excel experts. However, without continual tests of the model using actual data, you can never be sure if your assumptions are correct or if your outputs are useful in making business decisions. It is important to constantly feed real data back into the model after your forecasted periods have passed. You may find errors in your assumptions, or factors that occurred in real life that you did not consider during your initial modeling. Continuous improvement and modification to the model are key to improving its accuracy over time.

Payables Management

Along with developing a useful cash flow model, focusing on payables is another important element to shortening your cash cycle. When cash needs tighten, the first place many organizations look for relief is the extension of vendor payables. However, it’s important to avoid applying blanket extensions on all vendors equally. Focus on suppliers and vendors who are willing to work with you to compromise on payment terms, as they may be willing to offering payment discounts that can be valuable to your organization despite the cash outflow timing.

Consider that delaying payment for certain vendors could have adverse effects on their business and could impact their financial viability, leading to overall shipping or service delays. The survival of your vendors during the pandemic could be critical to your organization, which makes communication and collaboration on payment schedules even more important than ever.

This may be the perfect time to perform a self-audit of vendor expenses and payables. Look to ensure you are taking advantage of vendor discounts where beneficial. Review whether proper sales taxes, excise taxes or tariffs are being charged by vendors and service providers. Shipping and utility charges are another area where errors can occur. Often these errors can go unchecked for years if your organization is not keeping a watchful eye on tax law changes or adjustments to contractual rates. Reviewing company provided cell phone plans can often lead to the discovery of unnecessary charges or plan features that are no longer utilized.

These are just two examples of tools to have in your cash flow management toolbox to help manage the ebbs and flows of an economy changed by the COVID-19 pandemic. Thoughtful planning and execution of a cash management strategy can be key for organizations to ensure their needs are met while minimizing the need to turn to outside financing sources. Our Bonadio Strategic Advisory practice is here to help you move forward – contact us today to discuss your specific situation.

The information and advice we are providing for this matter relates to COVID-19 legislative relief measures. Because legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that could modify some of the advice and information provided to you, after the conclusion of our engagement. We, therefore, make no warranties, expressed or implied, on the services provided hereunder.