Budgeting and cash flow management in uncertain times

With a new financial year upon us, we are hopeful that the world, and our economy will start to thrive again.

The impact of COVID-19 may have taken its toll on your business through the end of the 2020 financial year, and rather than focus solely on the loss we are optimistic that you will start to see new opportunities, new ways of doing business and new ideas emerging.

With the ever-changing business landscape, budgeting and planning may seem particularly difficult.  We have put together some tips to help you.

Budgeting

Many businesses spend some time during June - July each year finalising their budget for the financial year ahead.  In a “normal” year you may base your budget on a number of sources of information:

1. Reviewing and, if need be, refreshing your strategic plan and quantifying new initiatives based on this

2. Reviewing last year’s results, budget and building on this with the new year expectations

3. Undertaking discussions with key staff regarding expected costs and revenue for the coming year.

However, in a world with COVID-19 pandemic, how is it possible to get a budget for the year when there are still so many unknowns?  The first step is to re-assess your goals.  This may not be a complete review of the strategic plan but the short-term goals may need to be reconsidered.  

• Are your goals still the same as prior years? 

• Has your business thrived, or will the goal simply be to survive another year? 

• Has a change in an operating environment lead to new opportunities you could not see before?

You may also need to critically look at your overheads and determine whether these are still appropriate.  Will you really need much of a travel budget?  Should resources be saved or spent on upgrading your remote communications technology (Zoom; Skype; online sales platforms; websites)?

Some things you can do when trying to formulate a workable budget include:

• Create a budget for only a quarter based on what you do know at the time. Set the quarterly budget as the last quarter finished so it can be adapted to the new information on hand.

• Split your budget into two or three periods/scenarios – COVID-19 hibernation; recovery; recovered/business as usual.  Whilst you may not know when each of these periods will start and finish it will at least allow you to consider what impact they will have on expected results.

• Factor in COVID-19 concessions as you know of them today.  In many cases these are only available until the end of September 2020, so the first quarter budget may look quite different to the rest of the year.

Forecasting

Given the uncertainty of the business operating environment, forecasting may become a more useful tool in the 2021 financial year than ever before.  A rolling 3-way (P&L balance sheet and cash flow) forecast is more frequently done than a budget and is generally something you may be doing monthly.  It predicts the trends in your financial results and gives you a more realistic view of what to expect in the ‘year to go’, and help you avoid problems. One of the most important aspects of this is cashflow forecasting.

Some of the things you can be doing to improve your cashflow in the short-term include:

• Debtor management:

  • Consider offering discounts for prompt payment

  • Ensure any payment arrangements with debtors are followed up on the due date

  • Consider using an external debt collection agency to assist

  • Look into offering clients external finance on their debt so that you receive the cash sooner

• Stock management:

  • Review your stock levels for slow moving or obsolete stock

  • Offer discounts for slow moving stock

  • Review whether the reorder point for stock is still the same – are there delays in your supply chain or is it that stock is moving slower so there is less urgency to re-order?

• Human resource needs:

  • What levels of staffing will the business need based on the stage (hibernation; recovery or recovered/business as usual)?

  • Will you continue to employ or need to outsource services?

  • Are you expecting any additional employment related expenses i.e. redundancy payments?

• Occupancy expenses:

  • Speak to your lessor and consider any rent deferrals or discounts that may be available (note that this may only be available until September 2020)

  • Does your business still need the same amount of space?  Reconsider your needs and whether there is an opportunity to change the way you do business.

• Government incentives:

  • If you are receiving JobKeeper, this should be factored in only until the end of September 2020.  What does the cashflow look like after this time?

  • The cashflow boost will also be fully received on lodging the September BAS.

• Capital investment requirements:

  • Do you expect that you will need to spend on infrastructure and assets in the coming months?  This may be as a result of changing the way you do business i.e. more online and virtual contact; maybe a different product is being developed.

  • How will these items be financed?  Bank debt; new investors; existing cash sources?

  • Note that with the instant asset write off and accelerated depreciation there may be some tax savings where your business and the item purchased is eligible.

• External sources of finance:

  • When you look at all of your costs and then the expected revenues, is there going to be enough cash coming in to cover these?  If not, how can this be financed?

  • Banks are ready to assist with finance however they still have to meet their normal credit criteria, even with the government backed loans.

  • Is it time to bring in a new investor with a cash influx?

  • Did you have extra cash in your own resources to lend or contribute to the business?

With so many new and changing factors to take into account; this process may be overwhelming.  However, If you fail to plan, you are planning to fail.

Don’t leave your planning in the “too hard” basket, it is now more than ever vital you are on top of your business’s finances and are forward planning and budgeting. 
 
How can your Moore Australia advisor assist?
We have a variety of tools we can use to assist and provide you with an option that works for your business, with weekly or monthly budgeting and forecasting tools available.