Ask any FD what their most important metric is, and it’s a racing certainty that the 13-week cashflow forecast is going to top the list. As anyone who’s been in a turnaround situation knows, unless you have a handle on the cash for the immediate future, you might as well give up.
(For those of you with a passing interest in quantum mechanics, cashflow is the Schrödinger’s Equation of financial management: it tells you where you’ve been, what’s going to happen next and, when you think about it, it’s the only truly worthwhile expression of “reality”…)
That’s not just about knowing whether you can make the next payroll, either. The cashflow forecast tells you where and how much you can invest; how to incentivise staff (sales or collections? Cutting costs or winning new business?); how to address your relationships with banks, suppliers and customers; and when you can breathe a sigh of relief.
This year, all those factors have been critical for most businesses. Even the ones who’ve benefitted from the pandemic – medical suppliers, online retailers, delivery companies, waste and storage firms – run the risk of overtrading. And they’ve been rightly watchful of receivables risk. Consumer-facing businesses might have had a field day; business-to-business has been a much riskier proposition, with late payment and counterparty bankruptcy real dangers.
Some finance chiefs have it easier. Blue-chip CFOs - especially in the US - have been able to issue hefty wodges of debt with relatively light covenants at incredibly low interest rates. That’s not because they’re especially immune from “long economic Covid” – the secular shifts in work patterns, structurally higher unemployment, city centre dislocation, vulnerable supply chains and the rest. It’s because investors need to deploy cash and there’s nowhere else to put it. Equities remain very fully valued, real estate’s rules are being re-written, gold has already hit all-time highs, and let’s not start on the Ponzi scheme over in the cryptocurrency markets. (Note that just before the lockdowns hit, the Economist was warning about the risk of corporate overleveraging... not all the structural risks are Covid-19 related.)
Another finance leader coping very well is Rishi Sunak, our next Prime Minister. (Caveat: pretty much every “next PM” never gets the keys to Number 10. Dare we suggest Rishi has a touch of the Michael Heseltine about him? Too beautiful and too popular to win over envious Tory MPs when the crunch comes…) He’s been able to find enough cash to run the furlough scheme, the CBILS, invest in the pandemic health response and more.
But no other FD is as lucky as Rishi: he’s got a compliant Bank of England that’s effectively printing money for him. The national balance sheet has an elasticity at which mortal FDs can merely marvel. His 13-week cashflow forecast is a lot simpler because, when push comes to shove, Andrew Bailey is prepared to buy government debt to meet that payroll.
That’s not to say Rishi doesn’t have half an eye on the longer-term future. Not only is he looking to frame government finances over 30 years to spread the pain, he’s also considering risky tax rises on the traditional Tory swing voter to avoid a return to an austerity agenda that would be incredibly damaging to growth – and national well-being.
It’s a lesson for the rest of us: just because the 13-week cashflow forecast is a must-have tool for every FD in a crisis, and just because we need to build agility to ensure our models are flexible enough to cope with rapid change, that doesn’t mean we can neglect the longer-term outlook. Even if we can’t see clearly six months into the future, much less six years, having a rough idea of how things might shape up, what that means for financial readiness and how that colours the advice we give to other people in the business is hugely important.
When you can’t see all that clearly, you have to guess… sorry, “estimate”. That doesn’t come naturally to many people, and we all fear our best guesses turning out wrong – especially if other people bet the company on them. But it’s so important to look for whatever signals you can find – and then have a go. Model it, scenario plan, read the tea-leaves, grab your crystal ball… any data will help assemble a picture and a plan.
Don’t take my word for it. Last week, I interviewed a senior VP at a logistics business that’s on the verge of investing many millions of dollars in temporary super-cooling facilities for vaccine distribution. His plea was for the usually conservative pharma industry – where regulatory and investor relations constraints severely limit open communications – to get talking. Yes, in usual times, sharing their “best guess” for vaccine performance or stability would be incredibly reckless. But he’d rather iterate based on evolving best guesses, so the company was already moving quickly, than wait for a perfect prediction and have to get going from a standing start. The perfect, as they say, is the enemy of the good. And ‘the good’ means survival.
That’s probably sound advice for most FDs right now. We can’t see clearly. Sure, we can’t just print money to cover our mistaken investments like Rishi. But if we sit still and hunker down until the rain clears, we’ll have no momentum. And we’re going to need a running start when things start to get back to normal, whenever that is.