Cash counts for firms as recession bites

Cash is king!' This commonly heard phrase is never truer than in today's environment.

Globally, we have recession, illiquid assets, reduced or expensive bank lending. Add to this the geopolitical and economic uncertainty. The harsh truth is that lack of cash is threatening the very survival of many companies.

In this region, the most common scenario is receivables piling up and, correspondingly, payments to creditors becoming overdue. Some companies have no choice but to seek private funding at exorbitant rates because bank finance is not easily sanctioned. For many, it is daily jugglery for cash.

Therefore, the one thing you absolutely have to do is manage cash flows actively.

Where does it start? Start with identifying all aspects of your business that affect cashflows. Secondly, you need to set up an internal reporting mechanism to capture all material cashflows at a central point.

Each unit within the organisation is then obliged to report all cashflows to the central point. Depending on the number of individual transactions, set a minimum amount for reporting to avoid getting bogged down administratively.

A critical aspect of cash management is cashflow planning. A good way of doing this is to slot expected cashflows in time periods: short term — daily and up to one week; medium term — weekly up to 90 days and; long term — monthly or quarterly over one year.

Once the snapshot of contracted cashflows is in place, it needs to be adjusted because we know that relying on contracted dates will not serve any purpose. You need to assess realistic probabilities of receivables actually coming in on due dates.

If they are not likely to be received on time, it should be shown in a later time-slot. The same can be done for payables, although you need to keep in mind that on-going delays in paying your dues can affect your reputation. And ultimately decide who does business with you and on what terms.

By netting the projected inflows and outflows in each time period, you arrive at the funding gap for each period.

Once cashflows are projected in this manner, you have a realistic picture of the cash situation of the company.

By doing this exercise on a regular basis, you can plan your funding in advance. This information is also important in obtaining the appropriate type and tenor of facilities from banks.

This cashflow process can be made more sophisticated by placing limits on each time period, setting up early warning signals, etc. For most companies, particularly SMEs, a basic cashflow projection like the one described above serves the purpose.

Why cash management? The process is certainly not new. What is surprising is that there are also a large number of companies that do not practise any formal cashflow management, especially in the SME sector.

Poor cashflow planning can result in severe cash shortages, sometimes triggering a domino effect of further delays and defaults affecting all aspects of the business — from delaying trade payables to non-payment of staff salaries. Unfortunately, over the last couple of years, this has been a common scenario for many companies in the region.

Implications

Because cashoutflows have not been addressed in advance, cheques issued could bounce; and the legal implications of that are only too well known.

Surely savvy businessmen know all this? They do, but somehow, cash management often takes a back seat to their predominant focus on business development and revenue generation.

Cash management is not crisis management. It is not something you deal with only when creditors are at your doorstep. Unfortunately, business owners sometimes have no choice but to put in personal funds to meet the emergency.

This applies particularly to SMEs where relatively small cash shortages can disrupt day-to-day operations. Clearly, this is not a sustainable situation.

It is important that all managers in the company clearly understand the implications of their actions on the company's cash position. Decision-makers in the company should receive daily forecasts and so that they can take preventive and corrective action, if required.

Cashflow planning and management requires the close involvement of managers across the company. In other words, it must become an integral part of the company's management culture.

The writer is the managing director of Salvus Strategic Advisors.