Control The Flow (Part 3) How to prepare an STCF.

An experienced operator's guide on how to prepare and maintain a reliable STCF.

Over the last decade I have regularly had to implement and use short-term cash flow forecasts (STCF) to help manage liquidity in a number of turnaround to growth assignments; it is the go to navigation tool for dealing with a cash crisis.

By way of follow up to the previous Control The Flow articles:

Part 1 – was about WHY implementing a short term cash forecast (STCF) is so important.

Part 2 - covered the 7 key areas WHERE to target cash management efforts.

However, you may be thinking:

i)    I know we need to prepare an STCF but how do we actually go about the exercise?

ii)   I’ve started but no one else in the business is really taking an interest.

iii) Or I’m embarrassed to share, as it is so far out from the forecast.

Therefore in Part 3 - I thought it appropriate to provide an experienced operator’s hands on guide on HOW to go about preparing and maintaining a reliable STCF with some useful practical tips for finance teams.

1)  Culture & Sponsorship

Due to the criticality of the STCF it’s imperative that the process has full CEO and Executive team buy in to help create a cash culture and a common sense of purpose. Especially in the current environment, the inputs and assumptions need to be timely, relevant, aligned and cannot solely be prepared in isolation by the finance team.

2)  Industry Dynamics

As well as the impact of the current economic environment it’s important to consider the different industry dynamics companies face. For example a retailer dealing with seasonal working capital cycles versus an IT provider with long-term contracts were costs are linked to certain milestones; will have different shaped cash flows and funding requirements.

3)  Time period & frequency

Typically the STCF will be 13 weeks so that it covers a rent quarter. It may be necessary to produce a daily cash flow, I recommend this covers ideally a two-week period and is aligned to the 13 week STCF.

4)  Populating the STCF – assumptions & source info  

i)    The STCF should ideally be based on a combination of the most recent reconciled balance sheet to provide opening balances and the updated p&l forecast i.e. incorporating the latest realistic sales forecast.

ii)   Reasonably accurate assumptions are required for the timing of cash receipts and payments by week; this is important to identify and manage weekly pinch points.

iii) The STCF should initially be populated with known fixed items and realistic conservative assumptions for items subject to change e.g. sales demand, revenues and associated variable costs.

iv) Appendix 1 provides useful examples of potential info sources and associated actions for a retail or FMCG business.

5)  Forecast integrity

i)    As with any forecast model it is inevitable in the initial weeks it may seem a bit of a Frankenstein’s monster i.e. wrong or widely out from forecast.

ii)   Do not despair it is essential at this point to actualise the model, investigate variances and seek to further refine with cross functional support.

iii) Take care to communicate properly at the draft stage i.e. the model is in development and is being refined to avoid the risk of damaging the credibility of the model or the finance function.

iv) Remember sales will be variable but payments should be known, controlled and relatively easy to forecast.

v)   I also recommend holding a contingency for sales shortfall or unexpected essential payments.

vi) The STCF needs regular weekly updating with relevant cross functional input taking care to reflect timing and permanent differences.

vii) Also when available ensure movements reconcile back to updated balance sheet accounts for bank, debtors, creditors, etc. to ensure completeness and integrity.

6)  Communication

i)    Due to the current challenges of remote working for finance and other functions try to keep messages simple, easy to understand and avoid jargon.

ii)   Whilst building and maintaining the model seek to use readily available online collaboration tools with dedicated owners for specific parts.

iii) The full STCF should be reviewed weekly with the CEO and senior stakeholders, and periodically with the senior management team to help focus but not distract the team.

7)  Key messages

In conclusion,

i)    The STCF is the key navigation tool when facing and dealing with a liquidity issue and it’s vital to implement the 13-week rolling STCF, as soon as possible.

ii)   This needs CEO and senior team support and input.

iii) The STCF should be based on the latest P&L forecast (incorporating an up to date realistic sales forecast) and the most recent balance sheet.

iv) It should be updated weekly and once established can be used as the basis for managing cash resources and taking decisions.

To all management teams I wish you, your employees and family safety and every success at this challenging time; and hope you find the above practical steps of value to your organisation in the current environment.