Covid-19 | 10 Essentials in Preparing your Cash Flow Forecast

26 May 2020

The Covid-19 pandemic has led to a renewed focus on liquidity management for businesses in Ireland and across the globe. We highlight some of the key considerations in preparing your cash flow forecast below.

Now is the time to revisit or develop a cash flow forecast for your business and update earlier assumptions in order to estimate the extent and timing of any incremental funding requirements over the coming months; as well as to begin considering the plan and estimated cash flow during the recovery phase.
Whether your business is looking to assess the adequacy of your cash reserves or preparing for a bank funding request, a robust cash flow forecast will improve visibility around future cash constraints or funding needs. It will also provide additional knowledge and direction at an earlier stage, which will help your business in navigating a path through the next few months.
We highlight 10 essential considerations when preparing your cash flow forecast during this Covid-19 period:
Income levelsKey focus areasAdditional considerationsAssess the best estimate for sales levels, in light of the current circumstances, and up to date data. Almost every sector of industry is being impacted to some degree by the current period of business closures and reduced demand, and unfortunately many sectors are suffering substantial reductions in sales volume. It is important to be realistic and reasonable when establishing the forecast sales volumes, and the increased risk of bad debts should also be assessed.Forecast the level of purchases, staffing costs, and overheads needed to operate the business and service customers. Purchases will be largely dependent on forecasted sales volumes, although there may be scope to curtail the level of purchases if stock management can be tightened. Re-forecast the operating costs on a line by line basis in light of any actions recently taken or impending around the cost base, and consider any further potential scope for operating efficiencies.The cash collection period and supplier payment timeline are critical assumptions which can have a material impact on the forecast cash position. Reflect any extension of credit terms expected for customers and the latest terms of credit agreed with suppliers. Include any payment deferral arrangements agreed with any parties (e.g. your landlord or the local authorities).The forecast should incorporate any government supports or grants being availed of. If availing of the Covid-19 wage subsidy scheme, you will see a reduction in wage costs. Both the inflow from the Revenue and the staff payments should be included in the cash flow. The latest payment plan for Revenue liabilities (including VAT and payroll taxes) should be reflected in the forecast.Highlight the operating cash flow to identify if there is a funding requirement to cover the operating activities over the coming months.Debt repayments as well as any other non-operating cash flows should be factored into the net cash flow. Calculate any cash headroom or the level of funding shortfall; and the timing around this.Additional scenarios of the projections should be run to test the outcome under different circumstances.The structure and layout of the model needs to be considered, as well as the format of the output to be generated.Prepare and assess the short term cash flow forecast, as well as the medium to longer term forecast The operating cash flow illustrates the amount of cash that is generated (or the cash shortfall) in respect of normal trading operations (i.e. before funding, or any non-trading items). The cash flow model can present the key drivers of the operating cash flow. The terms of any debt moratorium or alternatively, if a moratorium has not been put in place, the scheduled debt repayments should be included. In the event there is to be any essential capital expenditure or other non operating obligations, this should be factored in. Existing debt facility limits, including overdraft or invoice discounting arrangements, should be factored in. Any remaining shortfall will highlight a require-ment for additional funding, and the forecast timing identified will indicate a timeline for when such facilities will be needed. Stress testing should be considered around risk areas such as further potential reductions in trading levels, an extension of the lockdown period, a deterioration in working capital days, or weaker economic growth during the next year of recovery. Under each scenario, the impact upon the forecast cash levels and the headroom or funding shortfall should be reviewed. The key outputs should include i) the cash flow ii) the income statement (profit & loss account); and iii) a balance sheet, in order to maximise the functionality and rigour of the forecast model. The assumptions and workings for the cash flow forecast should be kept relatively straight forward with a more user-friendly logical flow. The cash flow forecast for the initial period should be prepared on a weekly basis to assess the potential short term impact during the lockdown period and consider any potential cash shortfall on a weekly basis. A medium to longer term forecast should also be prepared or revised in light of evolving expectations for the economic environment.This should factor into account any working capital requirement for the initial phase, as well as focussing on the cash generation forecast for the longer term.1Costs2Workingcapital3Governmentsupports4Operatingcash flow5Debt andnon-operatingcash flows6Headroomanalysis7Scenarios/Stress testing8Structure and format ofcashflow model9Medium and longer term10

At BDO, we understand the challenges in preparing forecast information. In order to help businesses through this time, we have developed a financial projections model which can be tailored to assist your business with preparing your cash flow forecast. For more information please contact a member of our Corporate Finance team: