'It all adds up:
Business finance explained' podcast

Garry Mumford (00:00)

Hello everyone and welcome to this, the first Insight Associates podcast. My name is Garry Mumford. I’m the Managing Director at Insight Associates and this time I’m joined by Simon Hammond, our Client Services Director.

Simon Hammond (00:13)

Hi, Garry.

Garry Mumford (00:15)

And also Mike Johnstone from TOMD, a business that we’ve worked alongside and know very well, who’s going to quiz us today about some of the things about cashflow management that he believes all businesses should be aware of.

Mike Johnstone (00:27)

Thanks, Garry.

Mike Johnstone (00:28)

So Simon, I thought we should perhaps start with the basics. The term cashflow is used a lot by accountants. But why should business owners care more about cashflow than they should about their profit and loss statement?

Simon Hammond (00:41)

Cash and cashflow is really the lifeblood of a business. Profit is really an accounting concept created by accountants, but it isn’t actually what keeps a business going. We’ve got an old saying in accountancy that ‘profit is vanity and cash is sanity’ because it’s the cash that really pays for the bills, pays for your suppliers and your staff and keeps the business running. So, a business that is on paper profitable could still experience cashflow problems.

Mike Johnstone (01:08)

I’ve heard that before Simon, but I think it’d be really good just to explain how that can be the case. If you look at your profit and loss and you’re making a lot of money, I think business people think ‘well that’s great how can I not have any cash in the bank?’ because it seems illogical.

Simon Hammond (01:22)

It’s really down to timing Mike. If you’ve got a sale of say £50,000, but it takes you 90 days to collect that cash from your customer. In the meantime, you’ve got to pay for your payroll for 3 months, your suppliers for 3 months and your various other bills. If that gap between receiving your money and having to pay for your outgoings is too large, then even a profitable business would experience a cash problem during that period.

Mike Johnstone (01:51)

And typically, what does a firm then need to do in that situation?

Simon Hammond (01:55)

The key really is having a decent reliable cashflow forecast. So, you’re forecasting out far enough ahead to spot any problems. In advance of having experienced the problems, you can then plan to mitigate them, whether that be short-term lending, delaying supplier payments or contacting your customers, maybe offering some discounts for early payments. So, there’s ways to manage your way through that period. But as I say, the key is to have foresight and be able to know when you’ve got a problem coming on the horizon.

Mike Johnstone (02:26)

Right, so the forecast should give you that indication that there’s a problem. But what sort of things in your experience do clients miss? What are the blind spots, if you like, in terms of cashflow?

Simon Hammond (02:39)

There’s a number, primarily not really understanding their collection terms and how their customers pay. It’s all very well having payment due in 30 days on your invoice, but are your customers actually paying on 30 days or are they squeezing it out to 45 days? So that could have quite a large negative effect on your working capital cycle. Other issues are either being too detailed in terms of cashflow planning, cash forecasting, that makes it impossible to keep on top of and keep it as a working tool, or alternatively not being detailed enough. So not really having enough granular detail to be able to spot anything well in advance of any cashflow problems hitting.

Mike Johnstone (03:23)

And presumably that balance is quite hard, isn’t it? Because you can’t be completely accurate, but nonetheless, you’ve still got to have some kind of forecast. So how do you achieve that?

Simon Hammond (03:32)

Well, using the Insight Associates cashflow model is a good tool! But seriously, we’ve developed a tool, a model that we’ve used over 20 plus years to really deal with that issue for our clients and client businesses. It’s about knowing and really understanding the key levers in your cashflow, in your bank account, whether that’s patterns of supplier payments or tax bills or whatever it may be, it’s about really having a thorough grip on when those events, cashflow events will be happening.

Mike Johnstone (04:09)

So, does past performance actually prove something for the future? So, you’re talking there about clients and when they have previously paid. Does that mean you can look back and say, actually, historically, this client pays on 90 days. Therefore, we can assume they’re going to pay 90 days in the future.

Simon Hammond (04:25)

Yeah, as a starting point, that’s definitely the way to start that cashflow forecast and base expectations on past experience. But also understanding that allows you to address those issues with your customers, for example, and have those conversations to ensure that they pay on terms rather than dragging things out. And that means that you will improve your cash cycle in the interim.

Mike Johnstone (04:48)

So presumably with a new client, obviously it’s easier for you with an existing client because you’ve got that history, but with a new client, presumably you’ve got to try and delve into that history and then potentially give them information they weren’t even aware of.

Simon Hammond (04:59)

Yeah, it’s definitely more of a challenge initially with new clients. What we have to do is really get a quick and thorough understanding of client businesses, primarily what the liabilities and outgoings are. As outgoings tend to drive any cashflow modelling because you’ve got committed payments due and then it’s about modelling the sales receipt cycle around that. Part of what we do with new clients is effectively scenario planning for cashflow. So, we build some contingencies into our models to say what will happen if your customers pay 15 days late, 20 days late, what happens if we push the supplier payments out by a week, that sort of thing. So that we’ve got levers that we can tweak and pull to come up with a working and accurate cashflow forecast.

Mike Johnstone (05:49)

And does that highlight things like where there’s going be a problem, for example, you know, VAT payments is the classic, where you say actually, we need to have a chat with the VAT man and try and spread the spread the cost of the VAT over a certain period of months. Presumably it’s better if you’ve got that knowledge in advance rather than wait until the last minute. Is that right?

Simon Hammond (06:04)

Absolutely. It’s the same with lenders. If you’re looking to approach lenders, be it a bank or other lenders that you want finance for your business, it’s about providing credibility. If you’ve got a cashflow forecast that you can stand behind and say, yeah, I’m happy with that. And the reason that we are confident in this is because we have done our work, done our research. That all helps add credibility. And the same is true for the VAT man, for HMRC. They will want to know that you’ve done some preliminary work to determine that you definitely do need to arrange a time to pay arrangement, for example.

Mike Johnstone (06:46)

I think I know the answer to this question Simon, but I assume that as an accountancy firm, if you contact a lender you’re more likely to get a favourable response than if a business owner contacts them?

Simon Hammond (06:59)

Yes, I mean, as a business, we are ACCA regulated. We’re full of qualified accountants here. That in and of itself generally gives some credence to any proposals or cashflow discussions that we have on behalf of clients with either lenders or HMRC. Just by dint of us being professionals and being experts in this particular area, it does tend to make the discussions a bit easier.

Have you got anything you want to chip in there, Garry?

Garry Mumford (07:30)

Yeah, I think the other thing that’s probably quite important with that is that we often are talking to the same people again, that we’ve got relationships with, that we know already. So, we understand them as much as they understand us and I think that adds a lot of credibility to both sides of the conversation. So, we often find that we can get better results as a result of that.

Mike Johnstone (07:48)

Yeah, I think that makes sense. Over what sort of period would you recommend that you do the cash flow forecast?

Simon Hammond (07:55)

13 weeks is really the perfect period. It’s far enough out to be able to see any potential issues looming on the horizon, but it’s not so far out that you’re getting into the make-believe land and finger in the air sorts of guesswork. So, when I say 13 weeks, it should really be a daily cashflow forecast during that 13-week period to really get into the granular detail of it.

Mike Johnstone (08:18)

Really, so you’re looking at it every day?

Simon Hammond (08:20)

Yeah, absolutely. That’s definitely, it’s a key control for us here. Not only is it making sure that what you expect to happen has happened, but also anything that you weren’t expecting hasn’t happened and adjusting forecasts and your daily forecast based on what’s happening in the business at the same time.

Mike Johnstone (08:38)

And presumably there some things which you just can’t forecast, you just don’t know are going to happen. You know, you suddenly get a client goes bust or whatever, you can’t necessarily predict that. So, there’s some things out of your control, but at least you’re giving the knowledge to the client, I guess.

Simon Hammond (08:51)

Yeah, even in that circumstance, we’re likely to get some warning in advance if we can see, for example, in your example, that customers’ payments are getting later and later and later beyond terms. That’s usually a good indicator that there might be some issues with that client. And on a separate, on a whole other separate topic about what you do about that and how we deal with that. But in cashflow terms, what we would do in that situation is basically assume that cash isn’t going to come in for the foreseeable future and therefore work our cashflow model on the basis that cash isn’t in the business. What problem does that give us? What can we do to manage that?

Mike Johnstone (09:31)

Yeah and that scenario planning then obviously leads into all of that it can take into account presumably lots of different potential disasters or positive things I guess.

Simon Hammond (09:42)

Exactly. Cash isn’t necessarily, or cashflow management isn’t necessarily about avoiding disasters. It’s about also what can we do? What can we invest in here? What’s affordable to help take our business forward? So, there’s definitely two elements of it.

Mike Johnstone (09:57)

And is cashflow forecasting a different function, if you like, for a growing business than you know, one that’s been going around 100 years and is just stable? I mean, if you’ve a startup that’s growing really, really quickly, for example, you know how does that feed into the decision making?

Simon Hammond (10:15)

Well, the fundamentals are the same. If we’re doing, if we work in a cashflow model on a daily basis, we’re going to be reviewing what’s happening in that business on the creditors list, on the debtors list, various other bits and pieces on the balance sheet. So, we understand what’s happening in that business and that informs our daily forecast tweaks. Now that’s the same, whether it’s a well-established business or a startup that’s moving rapidly, we’d be undertaking the same process for each of them.

Mike Johnstone (10:45)

Right, okay. And what’s actually involved in making sure that I’m maintaining an accurate cashflow forecast, as you said, obviously, you’re looking at it daily, but is it something that a business owner can do themselves? Or why is it so much better for you guys to be doing it?

Simon Hammond (10:59)

The reality is it’s quite a bit of work to maintain an accurate, constantly developing cashflow model. It’s the sort of thing that a business owner shouldn’t really be spending their time on. They’ve got better things to do with their time rather than managing cashflow. It’s one of those jobs that there needs to be an element of expertise that comes with it. So, someone needs to understand what they’re doing, they need to understand working capital cycles and the needs of the business. So, although it can be done on a very simple basis, that’s not really going to provide the value that you need from a cashflow model. So, I would always recommend having someone or having a business look at it professionally to make sure it’s maintained properly.

Mike Johnstone (11:50)

So Simon, you say that you keep an eye on cashflow forecasts for your clients on a daily basis, but do you provide them with that information every day?

Simon Hammond (12:06)

We tend not to update every day because that tends to become noise then in the background for the client business. What we do is we provide weekly reports and as a rule we tend to forecast, even though we’re using a daily cashflow model, we tend to provide weekly and monthly forecasts for the foreseeable future, 13 weeks and beyond. So, we provide that, but the work that goes on behind that, the client is confident that there’s a lot of intricate detail that goes into producing the output. So, we effectively distil all the many, many, many different elements of a cashflow into something that’s usable and valuable for a client business owner.

Mike Johnstone (12:50)

And just, so I guess you’re saying that you would provide reports, but obviously pick up the phone and flag something if it’s an impending disaster that they need to be aware of.

Simon Hammond (13:01)

Yeah, I’m happy to say that we don’t tend to see impending disasters because as I say

Mike Johnstone (13:07)

I meant for new clients really Simon only.

Simon Hammond (13:10)

Yeah, maybe. What we are good at is maintaining banking relationships as well. I know that many clients don’t have access to as the banks change their client servicing models to be call centres and not named managers. So, we’ve maintained a really good raft of contacts in various different banks so that we’re able to help when the situation arises, help clients with any difficulties in terms of day-to-day banking operations by virtue of having those contacts still.

Mike Johnstone (13:49)

Which is something obviously that the business owner wouldn’t be able to do.

Simon Hammond (13:52)

Yeah.

Mike Johnstone (14:01)

That’s great, Simon. Thanks very much. I’ve learnt a lot. Garry, any final thoughts from you?

Garry Mumford (14:07)

Yes, it’s been really interesting Mike hasn’t it? Thank you and thank you to Simon for all your comments. I think the big takeaway for me for this was the issue about making sure that your cashflow is not only realistic but perhaps erring on the pessimistic side. To my mind a good cashflow forecast you should always better it, not do worse than it because if you do worse the chances are you’ll run out of money. I’m sure you agree with that Simon.

Simon Hammond (14:31)

Yeah, absolutely. It’s always better to have more money in your bank than you expected than the other way around.

Garry Mumford (14:37)

Yeah, it’s always the cash that’s going to kill you, not anything else. So I hope everybody’s found this really interesting today and very useful to them. We will look forward to welcoming you to a future podcast in the series. In the meanwhile, if you want to learn a little bit more about Insight Associates and what we do, why not sign up to our Insight blog, which is available at insightblog.co.uk.

Thank you very much for listening.