- Modelling realistic revenue projections over the next 18 – 24 months (please click here to read this article)
- Accurately model (to the extent possible) the business’ working capital/liquidity requirements over the next 18–24 months; and
- Undertake an early assessment of business operations to ensure that productive functions are reflective of a new operating environment especially where Coronavirus (COVID-19) has led to a significant change in business models.
In this article, we discuss the second of these three priorities – modelling working capital/liquidity.
We look at the important issue of working capital/liquidity planning and some of the key considerations that businesses should be prioritising now to ensure that they are best placed to not only capitalise on returning demand, but also weather any cash crunch as the raft of government support measures are slowly withdrawn.
Whilst some sectors might have clearer visibility than others about the timing and pattern of returning customer demand, the reality is that there remains significant uncertainty about when and how the UK economy will fully exit lockdown restrictions.
This uncertainty is making it inherently difficult for many businesses to prepare short to medium- term trading projections, especially revenue. We have heard anecdotally that some businesses are choosing to forego the preparation of trading projections and forecasts in the short term until they start to see firmer evidence of returning and consistent demand.
We believe that this would be ill-advised. The risk with adopting a ‘wait and see’ attitude is that an unanticipated surge in customer orders for some businesses, driven by pent-up demand, will likely lead to significant working capital that will need to be funded. Not planning for this by obtaining adequate funding facilities, can lead to not only lost orders but in some cases, prove terminal especially where additional debt taken on to fund COVID-19 losses starts to be serviced.
Furthermore, we believe that the expected surge in businesses seeking new credit lines to help support impaired balance sheets and fund working capital, will lead to more expensive debt pricing. We would therefore recommend that management teams start considering what their likely short to medium-term working capital and wider liquidity requirements might be, with a view to getting facilities in place ahead of the expected dash for cash.
- Prepare integrated 18–24 months of financial trading projections with working capital analysis based on projected revenue assumptions;
- Prepare base, best and worst-case versions of the above trading projections based on a realistic set of assumptions with sensitivity analyses;
- Constantly review and revise assumptions underpinning the trading projections as more information becomes available about issues such as further easing of lockdown, returning demand, working capital key performance indicators and so on; and
- Review pre-COVID-19 pipeline and liaise with key customers to validate whether any orders will now fall away as well as the likely impact on projected future revenue.
The above considerations are not meant to be exhaustive but should hopefully provide some useful guidance as businesses try to plot their own routes back to some kind of business as usual.
