The only commercial vaccine for COVID-19. Cash.
That simple word means many different things to different people, but the common denominator is that you need cash to do it.
If your processes do not include short term rolling cash flow forecasting, the best time to start was before the do do hit the fan. The second best time is right now. There are many templates out there, but the information required is simple:
A forecast of the cash coming in.
A forecast of the cash going out.
This is not a managed number like a profit and loss statement, it involves only what goes in and out of the bank account.
My preference for most circumstances is a 13 week rolling weekly forecast. It is long enough to give a good picture, short enough to be sensitive to the immediate challenges that arise.
As a sibling to cash flow forecasting and a little more complex, is an exercise to ‘stress test’ your business. It is in effect a model to enable you to test to see how long your cash will last given a variety of assumptions about the trading environment.
To do a stress test, you need 8 pieces of added information, some will be forecasts, others will be sourced from your trading history, captured in the P&L and ledger accounts. The importance of each will vary depending on the type of business you are in. For example, physical inventories in a service business do not exist, but there will be a work in progress number that can take its place.
Projected revenues
Margins
Fixed costs
Variable cost of goods sold
Accounts receivable
Accounts payable
Inventories.
Cash reserves and available lines of credit
You can make this a sophisticated and challenging exercise, and in a large business, it should be. However, in an SME, it should be simple enough that a competent bookkeeper will be able to create a simple spreadsheet that will reflect the impact on your cash reserves of changing assumptions about any of the variables. Even just the conversation about the weighting of variables going into the stress test model, and their underpinning assumptions, will be extremely valuable.
When you could do with an experienced outsiders input, give me a call.
Header cartoon courtesy Scott Adams and ‘Dilbert’