Adam Trew
Alerts, Pilot GO

Cash flow forecasting should be a fundamental component in the management and planning of your business. The effects of COVID-19 have brought much negativity and uncertainty for businesses in general. Consequently, now is an opportunity to review your approach to regular cash flow forecasting. Forecasting cash flow is vital to navigating downturns in challenging business environments.

Common constraints

Cash flow forecasting is often not done in a formal way. This may be due to a real or perceived lack of time and resources. Furthermore, complacency or scepticism can arise where there is a history of managing without forecasting or where there is a belief that predicting the future is impossible. Finally, some businesses believe that an annual EBITDA budget is sufficient. In our view, such thinking can leave a business dangerously exposed in hard times or when the business needs to demonstrate its sustainability to external parties.

Impact of COVID-19

There is currently unprecedented pressure on cash flow. Businesses have been closing down, sales declining, and payments deferred. The relaxation of restrictions is piecemeal and unpredictable. The concessions introduced by the government provide temporary relief. However, they do not remove the need for cash flow planning.

Some tips for your cash flow forecast

Cash flow planning is not a test of your ability to predict the future but a requirement to plan for possible outcomes. It is OK not to know the future: it is not OK not to prepare for it. A rule of thumb is a three-month cash flow forecast. This timeline is short enough to reduce uncertainty but long enough to allow time to react.

1. Start by determining what you know.

  • When and how much are your payroll runs, JobKeeper payments and any agreed deferrals?
  • When and how much are your debt servicing obligations? What are the debt covenants?
  • How much cash do you need each month to cover non-discretionary expenditure?

2. Consider options to increase flexibility or certainty.

  • Which payments can be legitimately deferred?
  • Which payment terms (with customers or suppliers) could be negotiable?
  • What discretionary spending has been cut and could be further cut if necessary?

3. Be flexible.

  • Consider more than one outcome in your forecast (e.g. timing of receipts or the start
    of growth).
  • What are your red flags (e.g. the events or metrics which would require you to take
    further action).

4. Ensure that your forecast is consistent with reality and consider it in the light of your profit or loss and balance sheet (a 3-way forecast). It is easy to forget key items.

  • Have you considered all expenses?
  • Have you considered the timing and amount of all receivables and payables, especially amounts deferred?

Constantly review it and update it for new information. Remember to beware of excess pessimism as much as unfounded optimism. Always keep it rolling three months forward. It is just as important to manage cash flow on the way back to recovery. Of course it should not take an emergency for a business to prepare a cash flow forecast. It should always be a key part of effective business management.

About Pilot GO

Pilot GO advisors have one goal – to help you grow your business with confidence. Our team of specialist advisors will help you streamline and automate tasks while giving you access to business insights and real-time data to make strategic business decisions.

Learn more

If you need help, or simply want to discuss cash flow forecasting, please contact Adam Trew or your Pilot advisor on 07 3023 1300.