Old Mill Updates

Cash Flow - how can I protect my business?

If you read my article on critical dates for cash flow over the coming year, we can already foresee that there are potential pinch points and times of real danger for the survival of business.

I am not an economist but, based on the predictable danger-times for business cash flow, it seems probable that we will be faced with not just a ‘V-shaped’ recession in Summer 2020.  There is likely to be an extended impact from the working capital effect on business into Autumn 2020, followed by a second downturn in Spring / Summer 2021 when the current VAT deferral comes back into play and the repayments on CBILS and BBLS loans commence after the repayment holiday expires; more of a ‘W-shaped’ recession.

In business, we need to accept the circumstances we are faced with.  Denial of the realities undeniably equals business failure. But, accepting the circumstances absolutely does not mean accepting the consequences as inevitable.  The role of a business leader (and of a business adviser for that matter) is to understand the circumstances, calculate the consequences and then to do something about it.

So, what can you be doing then?

15th May 2020

Risk assessment

This is all about understanding the circumstances you are potentially faced with as we emerge out of lockdown and try to navigate the new ‘normal’.  So, what could go wrong?

Obviously the specific list depends on your business, but it will probably include some or all of:

  • Demand for your product of service might be reduced
  • A proportion of your staff could be off sick or shielding
  • Return-to-work health & safety measures might impact efficiency and cost of production
  • Customer payments may be slower than normal due to their cash flow
  • Customers may go bust, leading to bad debts and loss of future revenue
  • Supply chain difficulties could make it difficult to obtain necessary materials
  • Or material prices could rise
  • A competitor could collapse leading to a big influx of orders. Sounds good, but what about capacity and working capital implications?
  • You could fall ill

The list can go on, and I definitely recommend sitting down with a blank piece of paper (or screen, I work entirely paperlessly these days!) and working through your own list of business threats.

Whatever your list, they probably group into five main categories:

  1. Reduced demand
  2. Supply chain
  3. Cost pressure
  4. Efficiency
  5. Cash losses

Projected impact

This could be a sophisticated financial model, enabling you to test the impact of a range of scenarios, or something more intuitive, but it’s an important step because understanding where the greatest impacts will come from enables you to prioritise your responses.  Assuming you prepared forecasts for a CBILS application, you may already have this available.

Something I frequently hear from business owners is ‘it’s impossible to do a forecast because it’s too uncertain’.  That may well be true, and indeed has never been more true, but the inability to accurately predict the outcome in some ways doesn’t matter here and in fact the uncertainty is the point of the exercise.

Certainly, we cannot project with any degree of reliability what sales, say, are likely to be in any given period in the coming twelve-months.  You can probably come up with a range though and try to estimate the outcome on a ‘low-medium-high’ basis, with the ‘medium‘ case being your ‘most-likely’ or ‘best guess’.  This is what we would refer to as Scenario Planning.


Scenario Planning

Scenario Planning is possible in Excel or Sheets, or with some of the fintech apps which can be linked to your accounting software.  If you have the skills, it’s immensely informative to do it for yourself, or you can get your accountant’s help with the technical side and focus your attention on the inputs and assumptions.

How is Scenario Planning useful? 

If your ‘medium’ most-likely scenario indicates that you will be fine and the ‘low’ scenario indicates trouble, then you may not need to change much now, but you need to be monitoring closely and ready to take action if there are any signs of reality tracking ‘low’ rather than ‘medium’.

Remember from our discussions of the working capital cycle though that the ‘high’ scenario is not necessarily good for cash, because growth tends to absorb more funds into stock and debtors.  Scenario planning helps you to be aware of the effect.

What if it just isn’t possible to come up with a realistic model or any kind of scenarios that are more than just a ‘finger in the air’? In that case we turn to Sensitivity Analysis.


Sensitivity Analysis

This is a hugely powerful approach to understanding the possible effects of uncertainty and it removes the need for a ‘crystal ball’.  Where we are financial modelling with a client, we will often consider Sensitivity Analysis alongside Scenario Planning.

What is it?

Technically, it’s if independent variable ‘x’ changes by 1%, what is the magnitude of the effect on dependent variable ‘y’, other things being equal (i.e. changing one variable at a time).  ‘Y’ is usually profit or more importantly, forecast cash (or peak funding requirement).

What does that mean in the real world?

If sales are 1% lower in September, how much lower is cash?  What if they’re 10% lower… or 50% lower.  At what point does the business run out of cash?

Similarly, if raw material prices go up by 1% (perhaps due to supply chain issues arising from the lockdown where the materials are sourced from), what effect will that have on cash?

If customers take an extra week to pay, on average, how much lower will cash be?

By now you may be thinking that’s all very interesting, but what do you do with it?

Going back to your list of risk factors and considering the sensitivity of the key output, cash, to each will reveal that some things have a bigger effect than others; i.e. cash flow is highly sensitive to Risk Factor A (maybe customer demand) and Risk Factor C (perhaps payment period/debtor days), but Risk Factor E (say, labour efficiency) has a lesser effect on cash unless it deteriorates by quite a large amount.

With this information, you know you need to prioritise managing Risk Factors A and C.

Most business owners will have at least a ‘gut feel’ on this anyway, but the exercise of calculating sensitivity is, if you don’t already do this, highly informative.

As with Scenario Planning, you can go as far as sophisticated forecast models or be a bit more ‘broad brush’ and calculate estimates from your accounts.  Your accountant / adviser will be able to help you.


Importance of information

Regardless of whether you are Scenario Planning with a sophisticated model, prioritising from Sensitivity Analysis or going with ‘gut feel’, all approaches are going to need reliable, real time information.  More than ever, monitoring your key performance indicators (the Risk Factors to which the cash flow is most sensitive) is essential during a crisis.  You need to be able to monitor these things daily, at least.  If you only find out how things are going in the third week of the following month when you get some management accounts, it’s already too late to take action.

This is where cloud accounting software and the app eco-system (providing real-time date) surrounding platforms like Xero are proving invaluable right now in giving us insights into what’s happening on a day-to-day basis.


The risk assessment will help you to identify the factors which can adversely affect the business’ cash and threaten its survival.

Scenario Planning will help you to work out whether immediate action is necessary or a ‘watching brief’ is required.

Sensitivity Analysis will help you to determine which are the most critical risk factors and focus your attention on those.

Underpinning it all is reliable real-time information.

How you then need to respond to what this is telling you is a big subject for another article.

For more information, or if you have any questions about any of the above, please contact your Old Mill adviser or email enquiries@om.uk.