Planning Ahead – Why Cash is King
C ash is a key driver of any business and in a time of regular interest rates hikes, the ability to pay off debt is becoming increasingly difficult, meaning that future liquidity issues for some firms are almost a given. Just recently renowned logistics firm Tufnells Parcel Express entered into administration, and while partly bought out by Shift, over 2000 UK jobs were lost. This isn’t to say that if the corporate governance team at Tufnells had prepared a cash flow forecast then it would’ve stopped them from entering administration. But what can be said is that keeping on top of cash flow can certainly help to indicate if there is trouble on the horizon.
The term ‘cash is king’ was popularised in the late 1980s by Pehr Gyllenhammar, the then CEO of Swedish car group Volvo. While certainly the term may now have some critics during this current high inflationary environment, it is still an important concept to consider, particularly for businesses with high capital costs, such as transport and logistics. Sam Willis, Audit Associate, looks at how and why businesses need to plan ahead.
1. Managing Working Capital Working capital, is the money available within a business to be used for its day-to-day operations, and it is what keeps the metaphorical wheels of logistics companies turning. Cash flow forecasting aids logistics companies in managing their working capital effectively. By estimating future cash inflows and outflows, a company can adjust its expenditure, negotiate favourable credit terms, and ensure that it has enough liquidity to meet its operational needs. This proactive approach prevents the costly consequences of delays and can help mitigate unexpected expenses, both of which can disrupt operations and damage client relationships. 2. Planning for Seasonal Fluctuations Many logistics companies experience seasonal fluctuations in demand. Whether it’s due to increased demand around holiday periods, seasonal sector demand (such as agriculture) or industry-specific trends, these fluctuations can significantly impact resources such as staffing, storage, vehicle use and subsequent maintenance, which will then in turn affect their cash flow. Cash flow forecasting enables logistics companies to anticipate these shifts and allocate resources accordingly. By knowing when and where demand is likely to spike or dip, companies can adjust their staffing, transportation and storage facilities capacities, ensuring that they can meet customer demands without overcommitting resources during the quieter periods.
Understanding Cash Flow Forecasting
Firstly, a simple definition: Cash flow forecasting is the process of estimating the inflows and outflows of cash within a specific time frame, typically on a monthly or quarterly basis. It involves projecting the expected cash receipts and payments, considering various factors that could influence the financial operations of a company. This forward-looking analysis allows companies to anticipate potential cash shortages, plan for investments, make informed decisions, and implement strategies that ensure their financial stability. While there are many useful resources available across the internet that can guide the preparation of a successful cash flow forecast (or if you don’t have the time, an experienced accountant will be more than up for the task), the aim of this article is to signify the importance and value that they can place in determining the success or otherwise of a business venture.
8 | SCRUTTON BLAND | TRANSPORT AND LOGISTICS
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