5 Mins
We can liken an organisation to the human body – there are various parts that play a crucial role in the ability to operate day-to-day. Although businesses and charities can generate profits/surpluses, if the cashflow isn’t managed they can ultimately endure heart failure. Cash is the blood to any venture and Directors/Trustees must make efforts to understand, monitor, and control cash levels to ensure it keeps flowing.
As we move into a new tax year, the government’s budget changes could impact spending and could potentially deplete the cashflow for many businesses and charities. Now is the time for organisations to look forward with their finances, rather than simply report historic results to Companies House/OSCR for compliance purposes.
If cash reserves are stretched, it is vital for organisations to prepare cashflow forecasts so they can plan for cash pressures over the short and long term. Cash pressures can be in the form of rising staff costs, rental obligations, loan repayments, or tax payment points (VAT and corporation tax payment deadlines). Many organisations need to juggle payment priorities to keep operations running smoothly. As cash bleeds out, organisations can become insolvent quickly without the opportunity for revival.
It has never been so important for organisations to have live up-to-date financial information to make cashflow decisions daily. Cloud accounting and automation software can assist with the burden of keeping financial data continually current. Organisations can use cashflow tools which integrate with existing accounting systems to predict the cash strains over a given financial period. Technology is the medicine required to help foresee any cashflow aches and pains.
Cashflow forecasting enables pro-active measures to be implemented before any fatal conditions occur, allowing organisation to mitigate any cashflow uncertainties and stabilise the cash cycle. There are other financial reporting practices that can be used in conjunction with cashflow forecasting, such as:
- Preparation of realistic budgets for income and expenditure for the year(s) ahead – report actual results against those budgets as you progress through each financial period.
- Monthly/quarterly management accounts – these allow Directors/Trustees to report and interpret results so decision makers can keep abreast of any predicted incoming cash troubles and take remedial action. Regular financial reporting helps Directors/Trustees look for any warning signs of the causes and symptoms of cash shortfalls.
Financial institutions or funders often require both historic and forward-looking financial information for funding applications. Similarly, lenders may require real-time financial data to ensure covenants are not breached. Even if your organisation is cash-rich and does not require funding at present, the position could change in future. It is therefore worth ensuring your financial systems are robust, with the capability to produce desired financial information quickly and without excessive manual manipulation.
Cashflow forecasting and budgeting is also essential for appropriately signing off the going concern assumption when the annual accounts are approved each year. Directors/Trustees must consider whether the entity is classed as a going concern at the approval date of the financial statements. This means Directors/Trustees need to consider whether the entity has the ability to continue for at least the next 12 months from the date of signing. This confirmation means the organisation has adequate resources in place to meet liabilities as they fall due. For Directors/Trustees to have comfort that the going concern assumption is appropriate, they should be looking ahead to the future cash inflows and outflows over the 12-month period from the date of signing.
Once you’ve got the cashflow forecasting and financial reporting in place, if there are indications a dip in the cash cycle is likely, the next step is to take action to avoid diminishing cashflow.
Suggested steps to recover from (or prevent) a cash crisis include:
- Ensure the invoicing process is online and prompt! This will help you accelerate the inflow of cash from your customers/clients
- Ensure credit control procedures are in place for customer debts. This could be through engagement with a debt factor to pursue older debts, or by offering early payment incentives such as discounts. Open communication with customers is encouraged to maintain relationships and to facilitate payment plans/arrangements
- Managing and negotiating payment terms with suppliers and agreeing payment timelines without jeopardising relationships
- Seeking funding from lenders such as loans or overdrafts
- Investigating options to raise capital from investors
- Cash injections into the organisation from directors/owners
- Cutting non-essential costs i.e. pausing/halting supplier contracts that are no longer essential for the organisation to operate (however this could be detrimental to relationships with these suppliers if you require their services in future)
- Maintain a cash reserve for emergencies!
If your organisation requires any assistance with managing cashflow, engage with finance professionals. Here at Henderson Loggie, we have a wealth of experience in our various specialist teams. To prevent your cashflow diminishing without warning, we can help you navigate your cashflow management process and provide life support for your organisation, so that there is the best chance of survival during a cash crisis! Often it can be too late, and things can become terminal.