Cash Flow Forecasting What is Forecasting? Why is it Useful? - PowerPoint PPT Presentation

Cash Flow Forecasting

• What is Forecasting? • Why is it Useful? • Assumptions and Questions to Consider Overview • Example of Inflows and Outflows • Actions to Take • Best Practices • Questions

Overview ▪ COVID 19 has created the need for social distancing which has in turn slowed the US economy ▪ In uncertain times cash flow forecasting is critical in navigating what your company should do and how different scenarios will effect your cash flow positions ▪ Depending on the industry, many companies will see lower revenue resulting in less cash flow, along with delayed receivables collection, as needs grow to step up payables to important suppliers ▪ All industries will experience some level of direct or indirect disruption caused by the COVID 19 impacts to our economy

What is Cash Flow Forecasting? ▪ An estimate of the amount of funds you expect to flow in and out of your business during a set period of time ▪ This is different than analyzing your income statement as cash flow forecasting assists with projecting your financial position over time while the income statement reflects expenses that have already been incurred ▪ Effective cash flow forecasting assesses multiple scenarios (often best and worst case) over both short and long term periods

Why is Cash Flow Forecasting Useful? ▪ To help highlight times where there could be potential cash shortfalls ▪ To aid in decision making (e.g. capital projects, when to take out debt vs when to use cash on hand) ▪ To assess trends in order to assist with short and long term financial planning ▪ Determining where to allocate resources to be most beneficial to the business ▪ During uncertain times cash flow forecasts with shorter intervals are more helpful in decision making to navigate your options

Assumptions and Questions to Ask ▪ Understanding minimum cash requirements ▪ What is the cash burn at the most-likely projected low revenue level? ▪ What is the likely zero-cash date under the worst-case scenario? ▪ In times of uncertainty it is important to have models that reflect different possible scenarios ▪ Ask yourself what's the status of your cash and liquidity runway today, and what do you anticipate it will be during the next 90 to 120 days? ▪ Each model should have the assumptions clearly stated, such as: ▪ Expecting collections to increase 10% to match the increase in revenues ▪ Expecting a 20% increase in accounts payable in 60 days because there is a capital project going on and the contractor’s terms are N60

Assumptions and Questions to Ask – Continued ▪ What is happening with your top customers and how does that impact your forecasting? ▪ Include in your model all potential sources of cash flows (e.g. Paycheck Protection Program (PPP)) ▪ Multiple models – receipt of PPP loan, having all or some forgiven, other financing arrangements, etc. ▪ Can any costs be deferred ? ▪ Extended terms for creditors ▪ Are you able to defer the employer portion of your payroll taxes?

Examples of Inflows and Outflows Inflows Outflows - Cash from Customer Sales - Payroll - AR Collection - Payroll Taxes (Quarterly) - Bank Financing - Accounts Payable - Sale of Assets - Insurance (Annual or Monthly) - Sale of Investments - Rent - Investment Dividends - Debt Payments - Investments - Utilities • Forecast cash flow scenarios by understanding which inflows and outflows are fixed and which can be restructured or optimized resulting in maximized cash flow positions.

May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Cash, Beginning Balance $ 500 $ 1,000 $ 2,400 $ 5,300 $ 6,200 $ 5,100 $ 1,000 $ 2,400 Inflows: Cash Sales 5,000 15,000 13,000 11,000 11,000 10,000 12,000 11,000 AR Collection 2,500 2,000 5,000 5,000 5,000 2,000 3,000 4,000 Loan Proceeds 8,000 0 0 0 0 0 2,500 0 Cash Flow Dividends 500 500 500 500 500 500 500 500 Total Inflows 16,000 17,500 18,500 16,500 16,500 12,500 18,000 15,500 Forecast Outflows: Payroll and Taxes (5,000) (5,000) (5,000) (5,000) (5,000) (5,000) (5,000) (5,000) Example Utilities (500) (500) (500) (500) (500) (500) (500) (500) Accounts Payable (8,000) (8,500) (7,000) (8,000) (10,000) (9,000) (9,000) (10,000) Insurance 0 0 (1,000) 0 0 0 0 0 Rent (1,500) (1,500) (1,500) (1,500) (1,500) (1,500) (1,500) (1,500) Debt Payments (500) (600) (600) (600) (600) (600) (600) (700) Total Outflows (15,500) (16,100) (15,600) (15,600) (17,600) (16,600) (16,600) (17,700) Net Cash Flow 500 1,400 2,900 900 (1,100) (4,100) 1,400 (2,200) Ending Cash Balance $ 1,000 $ 2,400 $ 5,300 $ 6,200 $ 5,100 $ 1,000 $ 2,400 $ 200

Actions to Take – What to do Now ▪ Evaluate all aspects of available federal programs (e.g. CARES Act) CARES Act - PPP Webinar Recording - 4/2/20 CARES Act - Tax Provisions Webinar Recording - 4/3/20 ▪ Assess collection efforts and consider the cash flow impact of offering customers discounts for early payments ▪ Control the flow of outgoing payments ▪ Right-size inventory to current sales ▪ Consider credit facilities and maintain communications with your current lenders

Actions to Take – What to do Now – Continued ▪ Maintain internal cash and cyber controls, particularly in any remote environment ▪ Contingency plans for accounting operations workforce ▪ Evaluate financial reporting requirements ▪ Assess internal and external audit needs

Best Practices ▪ Have multiple forecasts (short and long term) with different assumptions ▪ Develop an automated model that works for your Company ▪ Update forecasts for changes in actual results ▪ Increase transparency with owners and lenders by regularly sharing the cash flow forecasts

Questions?

Presenters Jennifer Richardson, CPA Joseph Rocco III, CPA Audit Manager Senior Audit Manager Email: jer@bcpllc.com Email: jkr@bcpllc.com Phone: (315) 234-1104 Phone: (315) 234-8152 Website: bcpllc.com Website: bcpllc.com

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