How To Forecast Cash Flow In A Crisis

How to forecast cash flow in a crisis? It’s no secret that any type of worldwide, national or even local crisis can have a severe impact on your business.

Ensuring that your business has enough funds to run throughout this time period is a hot topic for many company owners and employees alike.

In this article, we take a look at exactly how to forecast cash flow in a crisis. We also offer some tips for keeping your business in good financial standing.

Creating A Cash Flow Forecast

This can be for 3 months, 6 months, or throughout the whole year. We recommended breaking each section of your forecast down into monthly periods for better accuracy.

The Forecast

Excel or a similar spreadsheet alternative or financial modeling software can be a great platform for housing your forecast.

You can start by creating rows for each month, with total outgoings and earnings in their own columns.

Net profit and loss can be easily calculated using a simple Excel function to avoid the need for manual calculations. This will also enable you to model various influences and outcomes.

For the earnings of your company, consider the following:

• Services and/or products sold to customers
• Payments from any outstanding debtors
• Sale of stock of the business
• Any assets being sold, such as things like vehicles and machinery you plan on parting with, or even technology and business units
• Grants received from the government or other associations

Outgoings of the Forecast

And the outgoings for your forecast can include:

• Premises rents
• Cost of vehicles (fuel, insurance, etc)
• Any money owed to creditors
• Employee wages
• Cost of materials or items required to perform your services
• Expenses for daily operations (utility bills etc)
• Payments to shareholders of the business

Keep track of how much cash in hand you have available, alongside the current value of your assets (even if you don’t plan on selling them).

Hopefully, your business will continue to be profitable throughout the year, but having this backup is both reassuring and necessary.

You’ll also work on identifying potential opportunities to liquidate assets for cash. So, you see, every entrepreneur should know how to forecast cash flow in a crisis.

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The Impact Of The Crisis

While earnings and expenses can change at any time, a crisis may have a more dramatic effect on them.

The impact of a crisis upon your business can vary depending on your sector, but the most common factors are listed below.

Disposable Income

People may be struggling with money during a crisis. This can be because of work-related issues, or the need to spend more on essentials.

As a result, many individuals will have less disposable income. If your business depends on this, you may see a decrease in earnings.

Decrease In Payments Made From Debtors

Just like people may struggle with money, so might other businesses. The frequency of payments and incoming cash flow from debtors can slow during a crisis unless you have a strong, legally binding contract in place.

Similarly, it’s your duty as a business owner to keep on top of the payments you owe to others.

Changes To The Supply Of Required Materials

When a crisis hits, there is almost always a shortage of goods. If this shortage is related to a material or product you need in order to operate, your business may have to slow down during this period of time.

This can obviously have a negative impact on your earnings, as you have fewer products to sell or services to charge for.

Measures Enforced By The Government

Certain measures that are out of your control can also have an adverse effect on your company. For example, if people are not allowed to leave their homes, some businesses are bound to suffer.

However, this also works in favor of other companies, particularly those that are positioned well online.  You’ll take all factors into consideration when working out how to forecast cash flow in a crisis.

Why A Cash Flow Forecast Is Essential

Cash flow is the backbone of any business. This aspect of your company will likely become more and more important during a time of crisis.

Creating a cash flow forecast to the best of your knowledge will give you the following:

• Stability – It’s not crazy to imagine that during a crisis, your business may run at a loss for a month or more. A cash forecast will allow you to look to the future, hopefully with the positive outlook of your business becoming profitable again once the crisis has ceased.
• Planning – You can use funds wisely with an accurate cash flow forecast in place. By checking your predictions, you will be able to see the available amount of cash that can be spent without putting you in a troublesome position.
• Expansion – If you’re determined to make the best out of a negative situation, you could still look to expand your business through a crisis. By having your estimated cash flow in the back of your mind, you can allocate funds in the required areas. The most common form of expansion during a crisis is by acquiring an online presence. This can be in the form of a website, opening an Amazon/eBay store, or even by focusing more on social media platforms or even acquiring other companies

Plan For The Worst

Ever heard of hope for the best, plan for the worst? This saying is prominent when it comes to predicting cash flow.

Some savvy entrepreneurs actually end up creating multiple versions of their cash flow forecasts. They focused on different possible scenarios, with a plan to accompany each.

Here’s some food for thought on this.

Expected Cash Flow Forecast

This forecast will often be the most accurate, created with experience and knowledge of the industry you are operating within.

It’s important to remember that while this is an expected forecast, it should still take into consideration the effects of the crisis, including the most probable outcomes.

Expected Cash Flow Forecast

 

The worst-case version of your cash flow forecast can cover all of those ‘What ifs’.

• What if your supply chain is greatly diminished?
• What if a measure is enforced to stop customers from attending your venue?
• What if people’s disposable income is reduced throughout the crisis?

Think about the effects of the above factors and how they can reduce your earnings as a result.

Survival throughout a tough time is often the goal with this type of forecast, with cash in hand being used to hold a business over until ‘normality’.

A plan can be a great way of increasing the security felt by yourself and your business, should this scenario arise.

Of course, optimistic business owners can also create a forecast and plan for when they’re ahead of schedule.

This tends to include details related to expansion, with additional funds being added back into the business to grow at an exponential rate.

Of course, this cash can also be put into a reserve, to act as an added layer of safety.

While this is sometimes not likely during a crisis, it can act as motivation to persist and adapt to the changing landscape. For this reason, you should know how to forecast cash flow in a crisis.

Covering Your Bases

With a plan for the worst-case scenario, you can take measures to protect your business during a crisis.

This plan could include various steps to take should an event happen, perhaps ordered in terms of severity.

Measures could include cost-cutting methods or simply the need for an injection of cash from your reserves.

Here is a list of things that could be added to this plan:

Decreased Productivity

If there is less of a demand for your products or service, you could reduce costs by decreasing the output of your business.

This is particularly effective for food-centered businesses such as bakeries or fast-food restaurants.  Only produce amounts you know will be bought, or even switch to a product on-demand model.

Seek Help From Investors

It goes without saying that investors want your business to succeed, as bankruptcy can leave them in a large financial hole.

If you have a good relationship with an investor, reaching out and asking for help can sometimes be a valuable lifeline.

Keep in mind that by using this method, you may have to give away an additional percentage of your business, or agree to pay this monetary amount back in regular installments.

Advertising Your Service

Communities love to get behind businesses that they love and are struggling during a crisis.

Advertising your product or services across the web can be an effective way of reaching a new base of customers.

This sense of unity throughout a tough time can lead to many people sharing your business, regardless of whether they are a friend, family member, or complete stranger.

Adapt To The Situation

While this shouldn’t only be in your ‘worst case scenario’ plan, adapting to the crisis is a great way of staying afloat.

Think about spending some time to revamp your online presence, or offering new methods of buying locally.

Another great example of adapting to a crisis is allowing your workforce to operate from home while using Google for collaborating.

Prioritizing the safety of others, including yourself and your employees, can garner a positive reputation that will assist your business both now and in the future.

Temporarily Closing Your Business

If there’s little to no demand for your products or services during a time of crisis, you could consider ceasing operations for a period of time.

While this can sometimes lead you to feel like the current scenario has beaten you, there’s no point accruing fees with no earnings.

However, opting for this measure still leaves you with the responsibility of looking after your workforce.

You’ll offer financial benefits or provide them with the right information about the situation. The question is whether your customers will still be there if you try to reopen.

While the above tactics can work well during a time of crisis, there are also other ways of receiving financial relief, as shown below.

Look At The Available Financing Options

By not looking into the options available to your business, you could be setting yourself up for failure unnecessarily.

During a crisis, there is usually a range of financial help available to companies of all sizes. This can either be directly from your government agencies, or from loan companies offering reduced interest rates for their services.

Factor in all these sources when working out how to forecast cash flow in a crisis.

Even if your forecast suggests that your business is in a great position financially, assessing your options early is good practice.

If you find yourself in a tough situation all of a sudden, having additional financial slack can make all the difference. Especially if you don’t know how long the side effects of the crisis will last.

Researching from the start will give you security moving forward and may even allow you to expand during a crisis. When a grant or similar aid is available, using it to your advantage could completely change your situation.

Loans are another thing you could consider if your business requires financing. Again, thorough research will help you massively in terms of getting the best possible interest rates.

Check for loans through the government and local authorities before checking the wider internet.

Doing your due diligence to find the best rate could save your company huge amounts of cash and ultimately be the difference between sink or swim.
Existing or new equity investors can be a lifeline too.

Referencing Back On Your Forecast

Nobody can accurately predict the future 100%. Your forecast and actual numbers are bound to be different, even slightly, so referencing back to your predictions is a great way of monitoring progress.

This can either be highly motivational, or perhaps a learning experience, or both, depending on the outcome.

Keeping track of your actual income and outgoings is a standard business practice. So why not compare it against your forecast to get a rough estimate of your accuracy?

You can apply this to future forecasts for better accuracy.

How To Forecast Cash Flow In A Crisis

Now that you know how to accurately create a cash flow forecast and adjust it during a crisis, you can hopefully benefit from greater stability and freedom when making key decisions.

Remember to keep track of your progress and if possible, have a supply of cash built up to hold you over during a difficult time.

Adapting through a crisis and having relevant plans in place is key and can have a huge impact on your business’s performance as a whole.

Understanding how to forecast cash flow in a crisis can make a difference in the ultimate success of your business.

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