By Richard Martin, Associate Director, Corporate Finance, Grant Thornton in Belfast
With the current volatile economic conditions, finance teams and business owners should be focusing on the impact of the cash cycle on their business and ways in which the organisation can prepare to deal with any impact on cash.
Businesses don’t typically fail from a lack of profit, they fail from a lack of cash – so it’s vital for your business not to underestimate this and to keep on top of your cash position.
What things should you be considering in relation to your business’ cash management?
How are current conditions impacting your working capital and cash flow? A business with a net investment in working capital will need to fund this through cash, and any further increases in the net working capital position of a company will bring a further cash drain on the business.
Your business should be prepared for the negative cash impact of movements in working capital so that you can manage the position going forward.
How exposed are you to exchange rate and interest rate changes? There is likely to be volatility in exchange rates and interest rates. You should consider what variations may occur in your cash and cost profile from these fluctuations.
Have you factored potential cost increases into new contracts? Entering into new contracts, your business should be armed with as much knowledge as possible in relation to potential cost increases affecting the contract.
Contracts which may seem viable currently, could have the potential to be detrimental to the business in the future, if you are unable to pass on cost increases and you have been locked into an unprofitable contract.
Are you planning to refinance or seek growth capital? Depending on your individual scenario and industry sector, there may be a change in risk appetite of funders, which could impact, for example, on the availability of funding going forward, or on interest rates offered.
This should be considered when you are considering if the timing is right to refinance, or for inclusion when assessing your repayment ability in cash forecasts. Businesses should be exploring the Government support packages, such as the Coronavirus Business Interruption Loan Scheme and Job Retention Scheme, to enhance their cash position where possible.
Insulate your balance sheet. A robust balance sheet can help protect against harmful trading performance impacts. It’s important to ensure that you have enough liquidity in your balance sheet by reviewing and optimising working capital performance, exploring alternative sources of finance and reviewing hedging positions.
Reduce your cost base. You should consistently be reviewing your businesses operating model in order to identify any efficiencies that can be made.
Stop or decrease discretionary spend. An important aspect of cash management is the monitoring of discretionary spend. Your management should be considering whether costs are absolutely necessary for the success of the business.
Pre-empt cash flow challenges. One of the most important elements for management to concentrate on in times of volatility or restricted cash headroom is the ability to identify a cash flow issue in advance of the issue arising. In order to do this effectively, your business should review and strengthen your cash flow forecasting processes and assumptions.
Monitoring debt and covenants. It’s important to understand the impact of the cash flow projections on debt and bank covenants. Should the projections indicate a potential breach of covenants, the business should seek to implement strategies to mitigate against the breach.
While there may be many issues that are out of the control of business owners and finance teams, now is the time to focus on the areas you can control – and cash flow is top of that list.
For further information or advice, Richard Martin can be contacted at email@example.com
Grant Thornton (NI) LLP specialises in audit, tax and advisory services.