Last night after kicking off my shoes and while getting ready to hide under a blanket on my favorite sleeper couch, I started browsing through some unread WhatsApp group posts from the day. I always leave the naughty groups for last and there, on my Royal Enfield riders club group, the source of much laughter – albeit rarely wholesome – I stumbled on this joke that I’m sure many of you have also seen by now. It says: “So in retrospect, in 2015, not a single person got the answer right to “Where do you see yourself in 5 years from now?”
I found this funny and it made me smile. Admittedly, it would have been funnier if I had a glass of red wine in my belly with another one in hand – a memory that is distant but never forgotten. But still, it made me think of how getting into our comfort zones should not let us get comfortable. Circumstances can change in the blink of an eye and we should always aim to grow and develop and prepare for those tough times, even though we don’t see them through the haze of perceived certainty.
No one would have been able to foresee the COVID-19 crisis unless they were a Hogwarts Wizard with a crystal ball. No one would have known that some businesses would have to close their doors and lay off their staff and that those of us that are able to, would have to work from home while being full-time parents to kids that are not allowed (imagine that) to go to school. And sadly, no one would have guessed that so many people would die. Let me ask this question though. Let’s say we all knew that this would happen. Let’s say we all knew this plague would hit our land – what would we have done differently to prepare for the inconceivable worst?
Well, it’s too late for preparation now. We are on the proverbial ocean in the proverbial storm. We can see some smaller islands in the form of the less stringent Levels 3 and 2 lockdown restrictions, leading to the promised land of Level 1. The problem, however, is that there’s still a lot of water to cross and a lot of storms to weather and we can really only focus on a day at a time. Then there is also the scary thought of when we get to the mainland, Level 1, to what extent will this virus take hold amongst our people and what will the long-term effects be? There is so much uncertainty.
Here at Mpowered, we have had to go back to basics and remind ourselves to appreciate the importance of cash flow forecasting. As much as we can’t see too far ahead, we have realised the need to plot and plan our course of action by making use of the information at hand and ask ourselves the question of how these current events will influence our business. Forecasting should not be confused with budgeting. At the beginning of the financial year, most of us signed off on our annual strategic budgets which we spent hours developing while going to town on lots of coffee and biscuits. These budgets are very irrelevant now and this undoubtedly supports the crowd that advocates the uselessness of budgets. Budgets are important, but forecasting is even more important.
Businessdictionary.com defines forecasting as follows: “A planning tool that helps management in its attempts to cope with the uncertainty of the future, relying mainly on data from the past and present and analysis of trends.” The dictionary says that forecasting starts with certain assumptions based on the management’s experience, knowledge, and judgment. These estimates are projected into the coming months or years.
Since any error in the assumptions will result in a similar or magnified error in forecasting, “the technique of sensitivity analysis is used which assigns a range of values to the uncertain factors (variables).” Read more: http://www.businessdictionary.com/definition/forecasting.html
Using the information we have at hand: our cash balance, monthly overheads, cash commitments, upcoming subscription renewals, and sales trends, we have been able to build a forecast that gives us an idea of if and when we will run out of money. This gave us insights into which expenses we should trim, and which suppliers we can speak with in order to arrange some reduced repayments.
Our forecast assumes a certain amount of new sales and contract renewals. We’ve had to apply sensitivity analysis to these assumptions to get a feel for which other expenses we need to cut drastically in order to save the ship, should we not meet our customer retention targets. Even though we have this forecast at hand, there is no guarantee that it is accurate and that we will be okay. That said, I do sleep much better at night knowing that we are using this tool and that it should give us the warning signs before it is too late.
Forecasting: a few tips to get ’er done
Forecasting does not have to be done on a fancy magical excel template, or with expensive cloud software. Your choice of the forecast will depend on the size and complexity of your business. There are many tools out there to assist you in the process, and if you, like me, are one of those people who enjoy coming up with your own solutions, then building your own could be quite fun. Just don’t get too busy building it and not busy enough forecasting. The point is to have a forecast that is well thought out and live – updated at least once a week.
Forecasting should not be done in isolation by the finance person or the entrepreneur. All role players, including the various department heads, should be involved in the process. You would be surprised at the valuable contribution that can be made by other team members. We have regular meetings with our team where everyone provides input and where our cash estimations are debated. This adds a lot of value and it removes the pressure from me as the accountant, to formulate all assumptions. Communication is key. Should matters turn for the worse in your business and you have to start speaking about the uncomfortable topic of salary reductions (if you haven’t been forced to do so already), a world of difference can be made by engaging with your employees on their ideas to reduce cost and encouraging them to volunteer reductions in their salaries.
Some employees could afford a 20% to 30% in salary reduction, while others can’t. Weighing a larger portion of salary cut to those that can afford it will alleviate pressure from those that can’t, and still assist management in reaching the goal of reducing their largest overhead significantly. Once business and cash flow return to normal, those heroes could be rewarded through a bonus, or through the business refunding the salaries they sacrificed or both.
In conclusion, I would like to circle back to my previous hypothetical question – if we knew this crisis would happen, what would we have done differently? Here are some parting thoughts that if applied, could assist you in being more prepared for those unforeseen crises:
Build an emergency cash fund:
Many businesses are in trouble today due to a lack of cash reserves. Cash is king. It is important to shorten the cash cycle in your business as much as possible. This means, don’t overstock your shelves if you keep inventory. Chase your debtors more and shorten your collection days. Pay your suppliers on time — they also need to survive. And stay away from debt – debt is expensive in our country and we easily get attracted by the desire to have the best of everything even when we can’t afford it. No, I say! – Read The Millionaire next door by William D Danko and Thomas J Stanley.
Your accounting is vitally important. It ensures effective financial management and it enables management decision making. Without accurate and up to date management accounts, you simply can’t manage your business. Your management accounts should include an income statement, balance sheet, and cash flow statement. You should also include a forecasted income statement, balance sheet, and cash flow statement. You should know the KPI’s and business ratios applicable to your industry and measure them monthly, keeping an eye on where they will be in the future. Your management accounts should be available within the first 7-10 days of the month. You simply can’t afford to wait 15 or 20 days for these numbers.
Set your accounting, payroll, and admin processes up in such a way that you can work from anywhere in the world. Cloud accounting and software is no longer a new fad. In fact, if you’re still reliant on servers and need to be in the office to get work done, then you simply won’t be able to adapt to forced change. At Mpowered we make use of cloud accounting and payroll software as well as Google Drive and OneDrive for all our filing. Except for my notebook and pen, I run a totally paperless system, and this has proved on many occasions to be a lifesaver, including now.
Become a compliant business:
Our government has done a great job in formulating strategies to assist small businesses through this time. These strategies include the UIF TERS program, The COVID-19 SMME Relief fund, and PAYE, SDL, and Provisional Tax deferments. The catch is that these programs are only available to businesses who are compliant with UIF (For the UIF TERS Program) and SARS (For the PAYE, SDL, and TAX deferrals, and of course, the SMME Relief fund). So, ensuring that your business complies fully with tax and governance legislation will open up channels for financial assistance in future crises.
Run an ethical business:
Ethical business practice is the practice of treating your stakeholders well and with respect. At the very least these include your employees, customers, suppliers, regulatory authorities, and the environment. There is a very direct relationship between ethical business and sustainable profit creation.