4 best practices for CEOs and CFOs to better anticipate their cash flow

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Surge in bankruptcies expected among UK SMEs in 2022: 4 best practices British CEOs and CFOs can take on to better anticipate their cash flow

Stock market valuations keep beating record highs and many start foreseeing the burst of a bubble which may well raise upcoming difficulties for UK SMEs. Last week, famous US investor Jeremy Grantham went as far as predicting a ~50% drop in the S&P 500.

Notwithstanding such pessimistic predictions, the combined effect of rising inflation, supply chain disturbances, and withdrawal of Covid-related government support hints at an expected rise of insolvencies in the UK. In November alone, 1,674 insolvencies were registered in the UK, up from 19% in October.

Insolvencies mostly arise when businesses are unable to pay their debts when they are supposed to. It is a cash-related issue, which can threaten even the most “profitable” business, from a P&L perspective. One single insolvency can indeed affect dozens of other businesses in a given supply chain, due to delayed or unpaid debts.

Now what does that mean for British CEOs and CFOs of the nearly 2.5m SMEs of 5-50 employees currently operating in the UK? They can take on four best practices to better anticipate their cash flow and stay in a healthy financial position.

1.Build a structured diagnostic of the current cash flow situation

First things first, it is key to understand the proper structure of cash inflows and cash outflows of one’s business, i.e. to draw out the key categories in a comprehensive, yet synthetic tree structure. This structure should not be as detailed as reglementary accounting categorisation, to facilitate readability and regular updates.

Using this structure, the CEO or CFO can then draw up the current debtors and creditors situation, listing open invoices, open bills and their realistically expected payment dates (which unfortunately often differ from the “contractual” due dates)

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2.Set-up an efficient real-time monitoring of the cash inflows and outflows

Leveraging the synthetic structure previously built, we can now easily categorise all upcoming cash flows and start building a proper understanding of what comes in and out the bank accounts. Ideally, the CEO or CFO would also categorise historical transactions (6 months minimum) to retrospectively analyse the situation.

This is where one may start wondering how a busy entrepreneur can find the time to process this amount of transactions, especially in a business that has several banks, bank accounts, or even currencies → see best practice n°4 on adopting a cash flow management software

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3.Forecast future cash flows for the next 3-6-12 months, with several scenarios

Once historical cash flows are categorised, with an efficient monitoring in place for categorisation of upcoming cash flows, it is time to objectively anticipate future cash flows, with three main methodologies, to be used wisely, depending on the categories: for relatively stable and predictable categories (rent costs, staff costs, insurance…): set-up a stable, recurring forecast, which often can be based on historical data for more complex, fluctuating categories (cash inflow from clients, supplier payments…): modelise the forecast based on future business plan and commonly observed pattern of payment delays for any category which is correlated to other categories: set up the relevant formula to account for this correlation (e.g. marketing outflow = 8% of client inflow)

This forecast modelisation should include several variations, to account for the uncertainty of the forecast (e.g. pessimistic vs. optimistic, aggressive recruitment or investment scenario…)

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4.Automate and simplify this process with a cash flow management software

Efficient monitoring and anticipation of the cash flow can seem a time-consuming or error-prone exercise. It can indeed become a nightmare when it is done on spreadsheets, as more than 80% of SMEs still do.

Fortunately, specialised cash flow management softwares are now available on the UK market to cater to the needs of British SMEs, from the most simple set-ups with single bank accounts to the most complex ones (multi-banks, multi-currencies, multi-entities). Such softwares, like European leader Agicap, enable CEO or CFOs to easily set-up and automate the 3 previously mentioned steps, thanks to real-time connectivity with their bank accounts and accounting software, and thanks to experts available for a smooth onboarding.

Accurate cash flow monitoring and forecasting comes down to having the right processes and digital tools in place, while leveraging the relevant expertise to get this set-up. Public and private initiatives are a key driver for this broader and critical trend of digital adoption by UK SMEs.

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