Here’s why cash flow forecasting is critical during COVID-19

We’re so often told in business, as in life, not to get ahead of ourselves. But if there’s one time your company should do just that, it’s now. Getting ahead of your business self, in cash flow speak, is all about forecasting, running “what if” scenarios, planning for a range of possible outcomes, and then having a mitigation strategy in place so you can move forward. Sometimes, it might seem near impossible to think of the future while you’re in the eye of the storm, so here are a few things to consider that will hopefully help you on your way. 

Unprecedented event

Even if you had heard predictions about the coming pandemic, chances are you wouldn’t have done anything about them. So, if you think you somehow missed the signs, take comfort in the knowledge that the largest enterprises the world over were caught off guard.

Denial is not an option

While some businesses are weathering the crisis stronger than ever, the vast majority have been negatively affected, some even cripplingly so. Denial is a natural response. But you have to move past this so-called first stage of grief quickly, to avoid a liquidity crisis that could end up being so severe, you can’t turn things around.

Act short-term, plan mid- to long-term

While we’re solidly into month six of this event, most agree that a return to the new normal is anywhere from 12 to 18 months away. As you focus on getting through the fall, your forecasting should encompass at least 12-months out. Even if a V-shaped recovery is in the cards, it will be anything but perfectly linear, so take this into account.

Embrace technology

The virtual office is no longer a future aspiration; it’s a functioning reality. Look to this and other “future shifts” that will affect the post-COVID-19 work world. Technology has been allowing us to remove non-value-added tasks for decades. It’s time to accelerate that process by looking at all the ways technology can make your operations more efficient. 

Get on the path of progressive digitalization 

Call it digital transformation or progressive digitalization, it amounts to the same thing: future-proofing your business. Even the smallest company can benefit from digitizing their processes, especially when it comes to using forecasting planning tools. Using a cloud-based solution provides a flexible and secure single point of access, with automated updates and efficient version control. 

Work around potential liquidity crunches, now

Small companies typically have less access to liquidity—or ready cash—than their larger counterparts. So, it’s imperative that you reach out to your banker sooner rather than later. If you might need a temporary loan to see you through, don’t assume your line of credit is still available. The rules have changed in the face of this pandemic, so be proactive, and make sure you understand how and when you can access lines of credits and short-term loans.

Amidst the chaos that COVID-19 has created, it’s heartening to see how quickly all levels of government have stepped up with various relief programs. It’s critical to inform yourself about all available options when determining how to meet your short- and medium-term cash flow needs. Deloitte has an overview of the various COVID-19 federal and provincial relief measures you can access, including Export Development Canada’s Business Credit Availability Program (BCAP) Guarantee.

In moving forward with your proactive response, it’s easiest if you divide your activities into two parts: the first is comprised of mitigation strategies, while the second involves setting up the modelling tools that can evaluate and optimize your day-to-day operations. 

Part 1: Mitigation strategies

When considering mitigation strategies, it’s best to think in terms of what you can control right now, versus what you can identify as potential opportunities for new options in the future. 

So, what can you control right now? Your existing relationships. Just as I advised earlier that you should reach out to your bank, you should also reach out to your landlord, vendors, customers, accountants, and lawyers. You need to communicate, communicate and communicate some more. The more your business stakeholders understand what you’re going through, the more transparency there is within these critical relationships, the better positioned you’ll be to work through this storm. Whether it means renegotiating terms, asking to defer a payment, taking advantage of government programs, extending your credit line, or arranging a new type of financing, open and honest dialogue is the first step in any solution.

The second step is to take a hard look at limiting your discretionary spending to conserve cash. Typically, spending takes one of three forms: for growth, maintenance or transformation. When considering any outlay during these exceptional times, you need to critically assess the payback on any cash going out. Ideally, you want to ensure that any outlays are either growing your business, increasing your profitability, or maintaining where you are right now for the next few months. This is where scenario planning comes in handy, because you can test drive incremental adjustments to see what the overall effects are. 

Part 2: Daily management modelling tools

Consider your day-to-day operations and determine your current state. Once you’ve determined your immediate cash position, you can refer to this as your baseline. Using this baseline as your cornerstone, you can now use modelling tools to project out to see where you’ll be in 12 months. Invest the time to identify which technology software or platform will provide the types of forecasting you want. 

Using modelling tools, you’ll be able to project your future state by assessing various potential pivot strategies. You always want to be planning a few steps ahead so you’re not left miles behind.

I always recommend using a top-down, risk-based approach. When you’re starting out, there’s no point going too granular. The more scenarios and simulations you run, the more you can share the results with other decision-makers in your business. Then you can start to prioritize where you want to focus your efforts and have a clear plan on how to proceed in the short-, mid- and long-term.

Download Deloitte’s free report for more information on managing cash flow during a period of crisis.

Deloitte also developed a COVID-19-related webinar that addresses the challenges of working capital planning and cash flow management. Visit the hub, Combating COVID-19 with resilience, for an array of insights, perspectives and analysis.