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Importance of liquidity forecasts

Stress is knowing you have a problem and not knowing how to solve it. The real stress is not knowing you have a problem and having to find a solution on the fly.

Over the coming months, cash management and short- and medium-term liquidity will become increasingly important. Determining cash inflows and outflows, understanding liquidity and availability, managing short-term needs and guiding medium-term cash management decisions may require a shift from monitoring profits to ensuring sufficient liquidity to support business activities.

There are a number of common practices that should be examined and, if necessary, improved immediately, including :

  • Talk to your key customers and suppliers.
  • Find out what’s going on at home and how they’re adapting to the new realities.
  • Improve your credit checks. Set and communicate limits, then stick to them.
  • Beware of extraordinary or risky orders and requests. Get advance payments.
  • Spend time every day on collection calls.
  • Having a dedicated process, or even better, a dedicated person, can speed up the process. Don’t turn yourself into a bank.
  • Quickly resolve billing discrepancies and answer customer questions.
  • Examine suppliers’ payment terms for opportunities to save money (discounts) or extend payments.
  • Talk to your bank.
  • Find out about the availability and accessibility of additional funds.

These are excellent day-to-day management techniques. However, to provide the vision and tools needed to manage your liquidity in turbulent times, cash flow forecasts, in particular a 13-week rolling cash flow forecast, are an essential and valuable tool.

The main purpose of cash flow forecasting is to help you manage liquidity and determine whether the company has the necessary liquidity to meet its obligations and avoid funding problems. Proper use of cash flow forecasts strengthens your decision-making process, identifies potential deficits and cash flow needs, and gives you the ability to proactively manage potential problems.

A 13-week rolling forecast gives you a view from next week to the end of the quarter. Although the most accurate information is available for the current week or the following week, continuous forecasts enable the underlying forecasts to be adjusted on a weekly basis, creating the ability to adapt in real time to the situation experienced by your company.

Forecasting requires a number of key elements:

  • Have a good understanding of past practices and trends in collections and payment terms. Although what happens next is not a certainty, using your background as a reference is an excellent starting point.
  • Take into account potential changes to your company’s environment and operations. Talking to your key customers, suppliers and competitors will give you real-time information on what’s happening in your ecosystem.
  • Rigorous approach to forecasting, reviewing and updating your financial activity. Forecasts need to be updated in real time to ensure that the information is relevant week after week.
  • Involve the right people. While systems are important, the success of your cash flow forecasting process depends on the buy-in of your management team. Involving the key people who will implement changes in direction will ensure buy-in.

The real value of continuous cash flow forecasts lies in their use as a decision-making tool. Although forecasting is an inherently imprecise activity, it is extremely useful for identifying trends, understanding the approximate timing of cash requirements, and serving as an analytical tool for assessing operational changes.

Forecasts don’t have to be exact to justify their creation and maintenance. By asking your management teams to discuss the risks they face, taking into account the resources needed to avoid or mitigate problems or seize opportunities that may arise, you will have helped your company develop and execute a plan for situations that may arise.

This article was written by Richard Derienzo of Citrin Cooperman, an independent firm associated with Moore Global Network ©2020 all rights reserved. Used with permission.

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