18 June 2020

2020 vision – why keeping a close eye on your cashflow is crucial to recovery

Managing your cashflow is never more important, or challenging, than during crisis and recovery. Scrutinising all aspects of your working capital cycle can help you identify and respond to threats and opportunities.

“Uncertain environments create greater cashflow pressures,” says Gareth Anderson, Area Director, HSBC. “The risks of non-payment are heightened, your customers and suppliers will themselves be looking to preserve cash, and forecasting stock requirements can be a struggle.”

With all those elements of your working capital (or cashflow) cycle under stress, the key to managing the challenge, according to Gareth, is visibility.

“Having visibility over your cashflow is important under normal circumstances,” he points out. “But in times of crisis and recovery, that scrutiny needs to increase. Often, you’ll be required to make decisions more quickly, to respond and react to fast-changing circumstances. If you have visibility you can understand how these decisions will affect and be affected by your cashflow, and that puts you in a stronger position.”

Having visibility over your cashflow is important under normal circumstances but in times of crisis and recovery, that scrutiny needs to increase.

Gareth Anderson, Area Director, HSBC UK

The importance of visibility

Visibility is all about seeing and understanding the elements of your business that impact on your cash position:

  • Who owes you money and how long it has been outstanding for?
  • Who you owe money to and how quickly it needs to be paid?
  • How much stock you have and how quickly you’re able to sell it.

In that way, you can identify gaps that require your attention. That visibility, of course, becomes even more important if you’re looking to attract additional funding or support. For many businesses, the COVID-19 crisis has meant that they’ve needed to borrow funds for the first time, which can be a daunting prospect.

“If you can provide the bank with detailed information showing why you need to borrow and how you plan to repay, which shows that you understand your cash cycle and how different outcomes will affect it, you’ll be in a much stronger position,” says Gareth.

One of the biggest risks facing businesses as we move into recovery, is over-trading. You actually need to be as close, if not closer, to your cash to ensure you’re generating enough to recover properly

Gareth Anderson, Area Director, HSBC UK

Planning your recovery cash needs

Planning well can also give you greater confidence when you’re looking to the future, helping you identify potential risks and opportunities. “Planning when times are so uncertain is tough,” agrees Gareth. “If it was me, I’d be undertaking scenario planning, looking at the best case, the base case and the worst case, and asking myself what my cash need would be in each scenario. By interrogating the assumptions underpinning that, you’re taking a more proactive approach to managing your cashflow.”

That level of planning can be particularly crucial to avoid the pitfalls of recovery, explains Gareth. Whilst many businesses may see the crisis as the greatest threat to their business, recovery can be just as dangerous.

“One of the biggest risks facing businesses as we move into recovery, is over-trading. You actually need to be as close, if not closer, to your cash to ensure you’re generating enough to recover properly,” he says.

“As sales grow, you’ll be using and purchasing more stock, which can stretch cashflow, particularly if payments are slow coming in. It’s only natural to respond to the first signs of recovery by chasing turnover and perhaps taking risks you wouldn’t normally take, but it’s vital to employ sound risk management principles. Undertaking credit checks, not extending credit terms just to secure business, holding on to your cash for as long as possible – and, of course, maintaining that visibility."

The point of a forecast is that it lets you think about scenarios and how resilient your cash and therefore your business is under each scenario.

Gareth Anderson, Area Director, HSBC UK

The importance of cashflow forecasting

“Having strategies for each element of your cashflow (creditors, debtors and inventory) during these difficult times, is more important than ever,” says Gareth. “If we think about inventory, for example. Holding too much inventory ties up cash, but if you don’t hold sufficient inventory, you risk not being able to respond quickly, particularly if you have a convoluted or lengthy supply chain.”

Looking ahead and interrogating your cash requirement to ensure you don’t derail your recovery really can make a difference, but it can be difficult. “Virtually every client we speak to at the moment, asks what the point of forecasting is,” Gareth remarks, “when tomorrow it’s likely to change – and that’s absolutely true, but the point of a forecast is that it lets you think about scenarios and how resilient your cash and therefore your business is under each scenario."

It’s a fine balance between being opportunity-ready and not stretching your resources too thinly, but it’s an important part of keeping your recovery on track. “Having a cash runway is a good way of ensuring you have sufficient cash to support your recovery,” says Gareth. “That means looking at what your cash needs might be, contingency planning, and giving yourself a buffer in case, for example, stock moves more slowly than expected, or payments take longer. External financing can play a key part in that, and making sure that any facility is flexible enough to support your needs at a time when being agile is the key to responding to opportunity, is important.”

Accessing the right support

Selecting funding to support your cashflow needs will depend on your individual requirements and business circumstances. Businesses with a strong and growing debtor book, may consider sales finance, whilst those needing to bridge a short-term gap may consider an overdraft facility as more appropriate. Trade finance can offer risk mitigation alongside cashflow support for those trading overseas, whilst converting fixed costs into variable costs, through asset finance or sale and leaseback options can present opportunities to release cash tied up in your business.

However, as Gareth points out, “Finding the right solution is just a small part of the support available to help businesses manage their cashflow in these unusual times. This is when your relationship with your bank becomes increasingly important. It helps us understand your business, the people behind it, and your strategic ambitions. That way we can shape our financial and informational support to help you achieve your goals.”

Gareth Anderson’s strategic approach to better managing your cashflow

“When I’m discussing cashflow impact with customers, I like to refer to the acronym IQMr to help focus. In simple terms, that means:

  • Identify what the issues are (for example, reliance on a key customer)
  • Quantify the impact that will have on your business (if that customer goes bust owing you)
  • Mitigate the impact through considering options to enable you to respond to the issues appropriately (through diversifying your customer base, for example)

If you do that for each aspect of your working capital cycle, you’ll have a better understanding of the risks and opportunities and how to best meet them.”

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