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Looking for financial support? Your short to medium term cash flow forecast is critical

Matt Byrnes Matt Byrnes 20 Mar 2020

Since the outbreak of coronavirus COVID-19, the focus of authorities, governments and businesses has been on the health, safety and wellbeing of our people in balance with the health of our economy.

Policy makers urged businesses to find sensible ways to balance the needs of the business with the wellbeing of their people. For those that can, plans to facilitate remote working, new communication and engagement techniques between colleagues, and support programs for staff and families impacted have been enacted by many businesses in a relatively quick timeframe. The Prime Minister even went so far as to commend the business community for their swift actions to help flatten the curve.

In parallel, ‘Business Health’ has been, and will increasingly become, a critical concern. Supply chain disruptions are being felt from the supermarket floor right through to construction sites. Foot traffic has reduced as people stay home and the Government continues to set limits on how many people can congregate for non-essential purposes at any one time – with States and Territories enforcing these with hefty fines. We have now closed our borders to all international visitors. Qantas has cancelled all international fights in response, and has stood down two-thirds of their workforce. Tasmania has also recently announced a policy for anyone visiting the State from the mainland, including returning residents to self-quarantine for 14 days. It is not Business as Usual, and it does have an impact on business.   

Federal and State Governments have all recently delivered stimulus packages. Ministers are meeting with Australia’s energy providers and major banks about the support they can provide to Australians. Relief packages have been devised for the tourism, hospitality, aviation and agriculture services. The Reserve Bank of Australia has released a package to inject additional liquidity into the market.

While the entire economy has been hit, businesses with high levels of debt, high costs, and a high reliance on overseas supply chains will be particularly hard hit. On the ground, we are already seeing examples where key creditors – such as suppliers, banks and the ATO – are working with businesses to provide financial support during this very difficult phase. In the right circumstances, this can potentially include payment deferrals, interest free periods, or renegotiation of pricing and terms. However, in most cases, in order to access financial support, a business will need to present a sensible plan to its stakeholders.

Presenting a clear plan

This starts with a financial forecast (with an emphasis on short- to medium-term cash flow), based on assumptions that are realistic so that stakeholders have a good level of comfort that the business has considered the key risks – and possible scenarios – and can achieve their plan.

Often businesses, including those larger in scale, don’t have a rigorous short-term forecast to assist in making decisions. A sound plan should also consider downside scenarios, and will indicate to management at what points necessary funding will be required, so the business can manage the inevitable peaks and troughs that will come.

For businesses seeking support from their key stakeholders during this period, you must put yourself in their shoes and anticipate their expectations of you. A sensible plan incorporating a short- to medium-term financial forecast will make their job in supporting you so much easier.

Testing your forecasting in the short-and mid-term

Below are some questions to consider when formulating a plan.

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Financial

  • Do you re-forecast cashflows regularly to allow for changes in the economy or the business itself? In general, we recommend this occur on a monthly basis as part of end-of-month reporting, supported by a daily cashflow forecast for 12-14 weeks.
  • Do you understand your short-term working capital requirements – are you reviewing debtors and creditors regularly?
  • Have you considered how long your business can survive a mandatory shut down period without additional funding?
  • If you rely on regular funding during your normal course of operations, have you spoken to your bank about your situation and requirements? Early stage engagement and transparency will be well received by your lenders.
  • What are your obligations to the bank, specifically around debt covenants? Be aware of covenants and monitor if you are at risk of a breach as this can trigger a change in banking terms and in the relationship.  
  • Have you spoken to your insurance provider? Do your insurances cover COVID-19 interruptions, and to what extent?
  • Do you have back-up plans if your business partners shut down or are affected: specifically, what happens if your IT or payroll service can’t operate normally?
  • Do you understand the cost of continuing to operate with less staff / customers compared to the cost of completely shutting down for a period?
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Supply chain

  • How are your suppliers impacted by supply chain or manufacturing disruption caused by COVID–19, either directly or indirectly?
  • How dependent is your business on these suppliers? Does your business have a high level of concentration with a small number of suppliers? Is there an alternative supplier you can switch to?
  • Have you checked your contractual obligations with your suppliers? Are you bound by minimum order quantities (MOQs) which may be difficult to fund in the short term?
  • Have you communicated with your suppliers about how COVID–19 will impact your operations and how you expect any issues to be managed? Proactive communication with key stakeholders can assist in getting short term support.
  • Do you have contingency plans in place if your supplier stops operations? Are there local or regional alternatives?
  • Is there an ability to renegotiate terms with suppliers: for instance; reducing MOQs, deferred or longer payment terms?
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Customers

  • Are your customers aware of the origin of your goods and/or the potential impact disruption caused by COVID-19 may have on your product or service availability?
  • Do you rely on a physical retail space for sales, and what proportion of sales require direct customer contact?
  • Can you tailor your business to meet the needs of a remote customer? Is this an opportunity to grow?
  • Do you understand how COVID-19 disruption will impact your customers?
  • Are you proactively communicating with customers to understand and manage their expectations?
  • Have you reviewed your contractual obligations with your customers? Are they still relevant?
  • Could payment terms be shortened or altered to better manage your cash flows?
  • Are you dependent on a limited number of customers? What is your concentration risk and what are the consequences if they shut down?
  • Can you mitigate a downturn in spending with strategic advertising campaigns?

Can you provide additional reassurance over continuity of supply compared to your competitors?

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Governance

  • What are your current messages to the business regarding their preparation, management and response to COVID-19?
  • Do you have a contingency plan for those who may fall ill at your workplace?
  • Are you documenting regular board meeting minutes regarding decisions, with evidence of decisions?
  • Have there been changes in your organisation’s risk profile? Have you reviewed your risk profile and developed an action plan to record, address, mitigate and manage the risk?
  • What impact will the coronavirus have on your insurance policies?
  • Who else needs to be notified – who are the key stakeholders that are affected?
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Regulatory

  • Have you considered any potential tax relief by way of instalment arrangement relating to COVID-19?
  • Who are the key people in your business aware of legislation? Are these processes and requirements documented?
  • In terms of your key compliance staff, do you have a succession plan if one, or the whole team, becomes ill or is quarantined? What impact does this have on your regulated deliverables?
  • Have you considered government or the ATO’s support packages to those affected by coronavirus?

For more information, please contact

Matt Byrnes
Matt Byrnes
Partner & National Head of Restructuring...
Melbourne
View full profile

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