Planning Ahead – Why Cash is King

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.

Cash 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.

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.

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.

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.

Navigating Capital Expenditure

In the world of transport and logistics, staying ahead often means making strategic investments in technology, storage facilities, and fleet management. These investments can range from upgrading transportation vehicles, implementing new warehouse management systems or simply acquiring new additions to the fleet. Cash flow forecasting helps to provide the financial insights necessary to plan and execute these investments without putting an undue strain on the company’s cash balances. Companies can use the information available to evaluate whether or not they have the funds to cover the costs straight from the bank or if other financing options are required.

Making Informed Decisions

Transport and logistics is a dynamic sector, meaning that decisions must be made promptly and accurately. Cash flow forecasting can facilitate this by providing decision-makers with accurate and timely financial insights. Whether it’s determining whether to expand into a new market, negotiating contracts with customers, or the use of external financing, having a clear picture of the financial implications of future strategy is invaluable. This process has become even more of a consideration after recent events following the pandemic, when cross border activity came to a halt, to the more recent cost of living crisis. Now more than ever is it crucial that contingency plans are in place. Through the use of cash flow forecasts, decision-makers can analyse and make informed decisions on varying scenarios and ‘what-if’ events to ensure plain sailing through the murky waters.

Getting Through the Day

Whether your goals are to iron out the day-to-day glitches, expand your operations with new capital expenditure or merely just to survive another day, cash flow forecasts are an extremely useful tool to help with your decision making. Logistics and transport firms are no exception, since they need to maintain a well[1]functioning fleet, ensure there is sufficient cash to meet fluctuating diesel prices, as well as to meet the costs of staffing and dealing with periods of high demand. A cash flow forecast will help analyse your cash flow can help to ensure the smooth running of your company’s operations, which at the end of the day provides us with the satisfaction we all long for.

A finance professional can help you overcome your cash flow challenges by:

• carrying out an initial cash flow review to identify both ‘quick wins’ and opportunities for longer-term improvements
• benchmarking your working capital cycle to compare against your peers’ performance and identify potential opportunities to improve
• developing detailed action plans for your business, where the dependencies between cash, costs and customer service are optimised
• recommending appropriate technology solutions to ensure that your company is making the best use of the latest cloud-based accounting packages and apps
• supporting the implementation of sustainable procedures which focus on: optimising your processes throughout your working capital cycles compliance and monitoring identification and improvement of commercial terms

Get in touch with Sam or one of his colleagues to discuss how they can help with your cash flow forecasting. Please phone 0330 058 6559 or email hello@scruttonbland.co.uk