Business planning - cash flow and funding


Alan Hamilton

Alan Hamilton

Corporate Finance Director


A world economy bruised by the COVID-19 pandemic, a cost-of-living crisis and rapidly increasing inflation means businesses are facing an incredibly challenging set of circumstances.

A number of businesses will only recently have started to repay additional debt they took on to support them through the pandemic, together with the impact on cash flows of other support measures such as HMRC time to pay arrangements and business rates relief having ended.

Rising inflation and the impact on consumer demand will yet again create an uncertain outlook for many businesses. It is therefore essential that management teams plan ahead. Robust planning, including an analysis of downside risk, will allow management teams to assess the potential impact on the cash flows of their business and give them time to consider a range of options to help preserve cash reserves, to mitigate against the impact of rising costs and any squeeze on customer spending.

An essential component of cash flow and scenario planning for your business is assessing the potential future funding requirement in the short to medium-term, and looking at the options to address this promptly.

Liquidity management:

Scenario Planning and financial forecasting are key tools in allowing management teams to:

  • Identify any potential cash flow pinch points and funding gaps in the short to medium term;
  • Assess whether the business can address this via cash flow management OR third-party funding; and
  • Understand what a sustainable funding structure will look like to support the business.

Where third-party funding may be required, management teams will need to consider whether this will be met via debt or equity or indeed a combination of the two.

Debt funding

Many businesses are already dealing with higher levels of debt as a direct result of COVID-19. Combined with the impact on profitability from rising costs, and the cost-of-living crisis on consumer demand, many businesses will face a combination of higher-than-normal levels of debt and reduced profitability. This could be a limiting factor in accessing further debt funding.

Where a business has existing debt facilities it is important to ensure that these remain fit for purpose and provide the required headroom going forward. For example: if a business utilises invoice finance to support working capital in the short-term, if customer spending falls then a reduction in trade debtors could put the cash flow under pressure.

The planning process will identify whether current banking facilities are sufficient to support the business in the coming months and beyond. It is important to consider the appropriateness of any banking terms in place, such as financial covenants, and identify potential issues early.

There are also a few options you could explore with your bank to help your cash flow in the short-term, such as capital holidays on existing debt facilities; extending the term of facilities to spread capital repayments over a longer time period; and increasing limits or extending payment terms under invoice finance facilities and company credit cards.

What is not clear at this stage is the impact that the current economic challenges will have on the banks’ appetite to lend. Whilst banks will no doubt be impacted by a combination of higher-risk lending assets and an increase in bad debts, the UK banking sector is resilient and has stood up well to the challenges presented by the pandemic.   

Pick up the phone, speak to your bank manager and have an open and honest conversation. Short-term cash flow modelling and financial forecasting will support discussions with lenders, and provide a bank with the comfort that management have addressed the potential risks and opportunities their business faces.

Equity funding

Where there is a limitation to the level of debt funding a business can raise, a business may have to consider its options for raising equity.

This could provide an opportunity to help reduce debt levels in the business and put in place a more appropriate capital structure, and at the same time strengthening the balance sheet. Whereas a debt facility may utilise significant levels of cash in servicing interest and making capital repayments, an equity injection would allow more cash to be retained in the business.  

A business will need to explore whether an equity investment would come from existing shareholders or from a third party such as a private equity house or individual investor. Where a third party is the likely scenario, they too would wish to see financial forecasts and business plans to allow them to consider the opportunity. 

It is important to understand early on in discussions what the potential new investor’s expectations are on equity returns and time horizons for realising their investment, together with the extent to which they would wish to be involved in the running of the business.

Seek advice early

The earlier a business can identify potential issues, the more available options it will have to try and mitigate these. Our team has supported many businesses through challenging times and is well-placed to assist you with cash flow forecasting, scenario planning, reviewing your funding options, and fundraising.

Get in touch with me Alan.Hamilton@jcca.co.uk or your usual Johnston Carmichael contact for an initial chat.