Over the past several weeks, there has been a lot of talk about the 13-week cash flow forecast as a strategy for getting ahead of the COVID-19 Recession. News outlets, financial advisors, and management consultants have all suggested employing this technique, which is often used for turning around distressed businesses. Understandably, as we anticipate one of the most significant recessions of this century, businesses are doing everything they can to stay afloat during these uncertain times. With retail sales dipping 16.4% in the last month, overcoming cash flow problems will be critically important moving forward. With that being said, using a one-size-fits-all model – even one as effective as the 13-week cash flow forecast – is not the best approach now. Take a look at what a 13-week cash flow forecast is and explore some of the reasons why it isn’t an effective strategy for the current situation.
What is a 13-Week Cash Flow Forecast?
The 13-week cash flow forecast is an industry standard used in turnaround scenarios for businesses in distress. The same as a fiscal quarter, this timeframe is considered a good measure of a business’ financial strength. C-level management, investors, and banking institutions all rely on a 13-week forecast. A 13-week cash flow forecast reveals potential liquidity shortfalls before they happen, allowing a business to get ahead of the problem. A cashflow forecast balances anticipated receipts, like customer payments, against anticipated expenses, like payroll, taxes, and operating expenses. For a business in distress, the strategy in a 13-week cash flow forecast is to collect payments as quickly as possible while pushing off expenses. In so doing, a business will have more liquidity, allowing it to meet its short-term financial obligations. These short-term obligations are often those that keep the business afloat, like payroll, vendor payments, and overhead.
The 13-week timeframe provides a manageable balance between short- and medium-term cash flow plans. Short enough to allow for swift decision-making, it is also long enough to provide guidance on decisions that will be made further out. In short, 13 weeks provides balance between accuracy and range. The shorter the timeframe, the more accurate the figures will be. However, one fiscal quarter is not so long that shortcomings in accuracy will have a great impact on the cash flow forecast. Thirteen weeks is also a good timeframe for identifying and rectifying any liquidity issues before they become a crisis.
Pitfalls of the 13-Week Cash Flow Forecast During COVID-19
Without question, the 13-week cash flow forecast is typically an effective turnaround strategy. But these times are anything but typical. We have been plunged into a sudden and severe recession, affecting every industry in unexpected ways. In addition to a decline in retail sales, we are also seeing significant supply chain issues brought about by the COVID-19 shutdowns. Every business in every industry is being hit with cash flow problems. As a result of this, a one-size-fits-all approach, like the 13-week cash flow forecast, will not work to overcome the issues brought about by COVID-19.
Shorter Term Forecast Needed for the COVID-19 Recession
For the most part, a 13-week cash flow forecast provides a good timeframe to balance payables against receivables. However, the struggles we are seeing crop up due to the COVID-19 shutdown may call for a much shorter timeframe. Consider how quickly the COVID-19 situation changes day-to-day. Thirteen weeks ago, Ohio had yet to see its first confirmed COVID-19 case. The supply chain shortages we saw throughout the shutdown were unprecedented and unpredictable. Today, Ohio businesses are timidly stepping their toes into reopening. As businesses navigate through this time, it will be difficult to predict how the situation will look in a month, let alone 13 weeks. Evaluating the financial strength of a business during the COVID-19 Recession will require an individualized approach. Cash flow forecasts should be based on a timeframe unique to each company. In some cases, a 13-week timeframe may be appropriate. For those with more significant cash flow problems, monthly, weekly, or even daily forecasts may be needed.
Not a Viable Approach When Most Businesses are in Distress
The COVID-19 Recession is unique in that it is affecting every kind of business across every kind of industry. Even businesses deemed essential during the statewide shutdown are experiencing hiccups in their supply chain that are impacting their ability to meet demands. The 13-week cash flow forecast is effective in dealing with a normal distressed business situation or climate. However, if all businesses or non-profits simultaneously use this methodology of collecting receipts and pushing off payments, failure is imminent. It’s like playing a game of hot potato, but the last person holding the potato is the first to experience economic collapse as their expenses overwhelm the cash they have on hand. For this reason, a “copy and paste” solution used across the board will not work in the current economic climate.
To overcome the COVID-19 Recession, a business needs an individualized approach to handing any problems with cash flow. At Net Profit, we strategically evaluate each client before recommending or implementing a solution. We create strategies catered to each business or non-profit’s unique circumstances. We work together with our clients to develop a plan, while also explaining the rationale behind a plan that will actually work. The thought process and data needed to create an effective plan is multi-faceted. Let us put our vast experience to work creating a plan that will see your business through these uncertain times. Contact us today at (330) 620-2761!