Is there a formula to forecast and optimise cash flow?

Peter Simons, technical specialist, CIMA

There are different levels at which people tackle this. First people start talking about cash forecasting which is looking at your current position, what you have in debts in the pipeline, what inventory you have to be sold and who you need to pay. But you are just managing the information to hand.

The next stage is where people try to accelerate cash flow, which is a more detailed analysis. Who are the people that are going to pay them? Will they pay? They look at credit worthiness and focus on people who are more profitable customers and are the ones who are more likely to convert to cash. They do more detailed inventory analysis and make sure they only stop lines that sell and get more careful about the purchasing policy.

What we are looking at are financial measures that tend to be outcomes. The challenge for us is to provide more high-value analysis and get into scenario planning ­ looking at things like quality of product, quality of promotion and those intangible things that convert leads to sales.

How do you combine long-term planning with short-term liquidity forecasting?

Alison Morgans, senior consultant, Oracle

If we are looking at liquidity management, particularly restrictions on funding options for companies at the moment, the ability to actually forecast and be accurate based on the current state of affairs is something people are now really looking for.

In terms of credibility and your ability to argue your case for extended funding or for renegotiating funding options as you need, the more information you can present to your would-be bankers, the better the situation.

It is a combination of both the current state of affairs but also the impact that has on your strategic planning as a business ­ in terms of where you will be in two, three, four, five years from now.

Nevertheless, I still encounter very good name companies who are really struggling to generate timely information. Part of that is their system base ­ they are still using Excel sheets. They have not invested or have not really thought about the implications.

How do you combine carrots and sticks to get colleagues to focus on cash?

Neil Morling, group finance director, EC Harris

We originally started with, shall we say, the ‘positive stroke’ ­ a daily email saying ‘this is our cash balance, this is our facility, you can see what head room there is, what the direction of travel is on the cash’. We are now using the stick approach as well.

We set up things such as cash and credit committees, where we all sit down with senior members of the board and review outstanding debts. We ask the question: does it need someone like the chairman or the chief executive to get involved?

That has had a very good effect within the business, because it is one place they don’t want to be. So we have used the carrot and now we are using the stick.

I joined the construction industry from the automotive industry. I remember the US automotive industry two years ago saying it had got at least enough cash on the balance sheet to last for two years.

Here we are two years later and they’ve, in front of the House of Representatives, been seeking funding. We always have to take a view on the longevity of the challenge that faces us.

Have boards switched their attention from earnings to cash sufficiently?

Eric Anstee, senior adviser, Alvarez & Marsal

We have been trying to say for the last 18 months that liquidity risk management should be on all board agendas. And by that we are saying it should be embedded in existing risk procedures, they should
be stress tested.

Most importantly, people don’t have what I call an ‘emergency cash release area’. So that when you do get into the stress situation you can look at where you can release cash ­ capex being postponed or extending creditor terms. And there are asset issues that you can deal with and you may be able to unlock cash there. There is a whole range of issues where companies don’t ask: what the procedures are in case of emergency?

Now, of course, with the credit crisis, we are seeing a lot of those emergencies coming out. Increasingly companies are finding that they have bad debts. SMEs I have been talking to recently are all suffering bad debt experiences. If you look on the bigger side, on corporate bond spreads, they are indicating the market is expecting something like a 30% collapse in corporate bonds. That is built into the pricing of the bonds.

This tells you something about how likely future bad debt issues are going to be. When a bad debt hits, its obviously not just about the hit on the bottom line, it is about how are we going to make that cash up.

That is the bit that a lot of people don’t have in their locker ­ the emergency tool kit. It is just like getting a puncture in the car, you have to get out and work out how you are going to replace that hole in the cash.

Chaired by Damian Wild

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