The obvious answer during a recovery is for businesses to focus on growing the top line, cutting costs, and exploring strategic options such as selling parts of the business or entering new markets.
We saw this behaviour during the Global Financial Crisis and in the recession following 9/11 – but as a result, some companies took their eye off cash, with catastrophic results.
The lag between cash position and the impact on the P&L is difficult to predict in a situation like this. We don’t know how or when consumers are going to start spending again, and many businesses, particularly those in hospitality, leisure and travel, are starting from a very low-income base.
Spending levels may not reach pre-COVID-19 levels for months – or years, if more lockdowns are necessary.
It is therefore very difficult to know with any certainty how much cash will be coming in. What we do know is that costs will continue to be incurred regardless. The level of Government support released to prop up business in the past months has been extraordinary; the furlough scheme alone cost £14bn a month. Businesses have been able to defer VAT payments, as well as business rates in specific sectors, and HMRC’s Time To Pay arrangements were expanded.
The South West has received close to £4bn of funding across more than 107,000 facilities delivered under the Coronavirus Business Interruption Scheme (CBILS) and the Bounce Back Loan Scheme (BBLS). This will all still need to be repaid.
With that in mind, here are three steps that help create a cash culture that will help to protect liquidity:
- Make cash everyone’s business. People in all parts of the business make decisions that have direct implications for cash and the liquidity of the organisation. Payments are committed to and contracts are written that dictate the timing of cash outflow. Some functions might incentivise behaviour that could compromise liquidity (extended payment terms in return for greater sales for instance). It is essential that everyone making these decisions understands the vital importance of protecting liquidity. A cash-conscious culture is therefore very important.
- Involve everyone in forecasting as part of your cash-conscious culture. Cash flow forecasting should not just be done by the finance team. Many people make decisions that affect cash so build forecasts from the bottom up, involving the right people, from functions that make cash-related decisions, from the start.
- Stem the flow of cash at its source. Where does cash leave the business, and are there alternative options? Are employee incentives paid in cash, and could these be substituted? Does pension contribution policy need to be amended? Accounts receivable, accounts payable and inventory are all components of working capital that should be monitored to help access control cash outflow.
As with any cultural shift, embedding a cash management culture within your organisation requires management buy-in. Companies that succeed at this effort typically define their objectives up front, assign responsibility to people across the organisation and then track progress using monthly cash flow metrics.
Does your business operate on a cash culture? With liquidity at the very forefront of business today, developing a cash culture should be on every business leader’s agenda.
And don’t forget, if your business urgently needs funding, the Coronavirus Business Interruption Loan Scheme (CBILS) is remaining open until 30th November.
We are accepting applications for new and existing customers.
For more information please visit our dedicated CBILS page or call our friendly team on 01872 227 930.