Bank perceives you as a risk
With demand hit by recession, some costs (particularly utilities) still high, and an absence of further credit, it is inevitable that many businesses are trading at the outer reaches of their banking facilities. And with vastly reduced funds for lending, banks and (more importantly) their staff, are extremely nervous of continuing to support businesses that are experiencing difficulties. Tthey are acutely sensitive to how business customers are managing their accounts. Consequently, there is a great deal of attention being paid to short term cash flow.
Scared - you should be
The press is littered with cases of banks withdrawing support from seemingly viable businesses. So against this background, if you are struggling, of course you're rightly going to be anxious. It's never been so vital to be on top of your cash flow.
But most people running a business have no problem with the principle of short term cash flow. They typically keep a rolling 4-week spreadsheet of expected cash receipts and cash payments. But wait a minute - how frightening is that? Business owners and directors with personal guarantees and even their houses pledged to lenders (for perhaps tens of thousands) but they can see no more clearly than just 4 weeks into the future!
Beyond 4 weeks, one might find some pretty dubious looking formulae. This is precisely why, when banks look for short term cash flow projections from a client, they specify a 13-week timeframe. Most find it hugely distracting at what is already a difficult time, to produce a robust forecast at an appropriate level of detail that a decent bank (or worse still, Corporate Recovery person) can't punch large holes in.
13 week cash flow forecasts
So if your bank is seeking this information, possibly in conjunction with commissioning an IBR (Independent Bank Review) by their Corporate Recovery friends, that you have the pleasure of paying for, you have to appreciate the gravity of the situation.
You will resent both the cost and interference, particularly as the work is not for your benefit. And the implications of the exercise are serious; and if it goes against you, potentially terminal. So if you can see this prospect looming (or ideally even if you just want to get a better handle and tighter grip on cash flow for your own benefit ) give some thought to the following:
- Don't delay in taking ownership of the situation, particularly the numbers and the books - even if you haven't done so before. Lenders despair of business customers who think it's OK to have no idea about finance. So, if you need to, bring someone in to show you the basics (you're not after book-keeper level detail). But (at a minimum) you need to be able to gauge whether key balances are what you would expect them to be and to start to ask the right questions. It could take less than a day. And critically it could help your Bank to feel that you are someone they can do business with.
- It's important that the underlying book-keeping is sound and up to date. It often isn't (in which case those running the business are literally 'flying blind'). As in any field, there are good and bad book-keepers. If you are unlucky, and you're not close enough to the numbers to be able to spot what's happening, you leave yourself terribly exposed (and it could be at a point when you have precious little time to put things right).
- Some of the cash flow templates, even those (or perhaps especially those) claiming thousands of users, may be free but are poorly conceived. They amount to no more than guessing when receipts will come in and payments go out. It's not what the Bank is looking for and it won't give you what you need either.
- Neither is it appropriate to produce a cash flow worked up purely from the Profit & Loss Account (or Income Statement for those of you in the US). Sales and costs are, of course, relevant but it's how these play out in the balance sheet that matters.
- And not enough thought is given to what the Bank will consider to be a credible proposition. You need to be able to demonstrate how the measures you are taking (or will take) will help to preserve cash. If you do the projections yourself, play devil's advocate and be prepared to re-work the cash flow projections at least once a week (perhaps more).
- So give real thought to the changes you will make that will see your cash position improve. The Bank will calculate the impact of what you suggest. Make sure you're one step ahead - it's often trickier than you think. When we coach entrepreneurs in these situations, equipping them to talk to their lender in terms the Bank understands, is a key aspect.
- Don't make the mistake of thinking that cash flow problems are like an on/off switch - that you've either got them or you haven't. A business that finds itself struggling will typically not be able to transform its fortunes overnight from its trading alone. It can take 12 months+. And the road to recovery is never smooth. So keep the 13 week cash flow running. It will prove itself invaluable not only for being able to flag up any day-to-day cash crises, but also (and critically) help you focus on the cash you need to meet any quarterly commitments. And these are often big.
- If you feel really vulnerable, get someone experienced on your side (at an early stage if possible) to advise; maybe even a suitably qualified virtual coach. (They don't necessarily need to be 'on-site' with you.) It could prove a critical investment. Your staff can get other jobs (well, they used to be able to); you probably have even more at stake.
If any of the above is pertinent to you, perhaps take some comfort from what can be achieved in two extreme situations - see the scaffolding and windows case histories.
If you have particularly pressing concerns about your situation, you can call us in confidence and without obligation.
We can, if required, prepare cash flow forecasts (often remotely) from information supplied. These can be remitted in PDF format or printed and mailed as preferred.