The nine principles

Principle 1: CEOs should take overall responsibility for cash management if there is a risk of business failure

Decisions around cash will be fundamental to both short-term survival and the long-term viability of the business.

• Effective cash management requires communication and co-ordination across all departments.
• Obtaining cash from customers may need conversations at senior levels to overcome roadblocks, and to balance the need to get cash in quickly while maintaining customer goodwill.
• Similarly, maintaining relationships with key suppliers needs to balance difficulties in paying them while maintaining the supplies essential to keep the business going.
• Employee morale and their ability to do their jobs will be impacted by cash management decisions.
• Lenders will want confidence that the CEO is on top of all cash-related matters.
• The CEO needs to ensure consistent messages throughout the organisation and with stakeholders.
• The CEO needs to decide whether the business is viable.

Group CEOs need to co-ordinate across all group entities to ensure the optimal use of cash and credit facilities.

Principle 2: Ensure responsibilities, reporting lines and staff cover for all cash-related matters are clearly understood throughout the organisation

These will include:

• Communication with customers, suppliers, tax authorities, insurers and lenders, with escalation routes for when there are issues.
• Payment and expense authorisation levels, which may now need to be set at higher seniority levels.
• Maintaining cash controls such as bank reconciliations, credit checks and employee expenses.
• Monitoring details of government support and how such support changes day to day.
• Reporting.

Principle 3: Set up regular cash meetings involving those with insight on predicted cash movements

• Effective chairing is key to ensure focus, realistic action plans and clear assignment of responsibilities.
• The right people could extend from the CEO to the accounts receivable supervisor.
• Frequency depends on level of concern but should be weekly at minimum.
• Document knowledge gained and key action points with responsibilities.

Principle 4: Build up forecasting effectiveness by combining business experience with the best available evidence and improving forecasting processes. Human biases need to be managed. 

• The better the cash flow forecast the greater the chance of managing through the crisis and the greater the organisation’s credibility in engaging with stakeholders.
• Determine forecast horizons relevant for your business and level of detail for each eg, immediate survival, emergence from crisis and new normal.
• Draw on your best people to develop forecasts – research suggests those with training in probability and scenarios outperform others with similar experience.
• Develop information-gathering processes such as intelligence from all stakeholders, news scanning and insights from social media.
• However, weigh information carefully, considering:
  • sources and whether the information comes from more than one independent source;
  • anecdote versus statistics; and,
  • timeliness.
• Be objective, use professional scepticism and confront the facts.
• Avoid confirmation bias – this is where people seek out information to confirm existing beliefs and ignore other relevant information.
• Produce relevant scenarios including worst case, most likely case and best case. Include predictions of earliest date additional funding may be required.
• Ensure scenarios add value as ways of generating ideas and improving response times.
• Fan charts are a useful way of visualising the increased uncertainty around cashflows as forecasts extend further into the future.
• Assess accuracy of forecasts against actuals in order to improve processes.

Principle 5: Design cash flow reports to support critical business decisions and funding applications. They should be understandable by non-accountants

• Cash flow forecasts are fundamental to determining whether the business can continue in its current form or whether more radical solutions, such as turnaround or insolvency, are necessary.
• Lenders will require cash flow forecasts as part of loan applications and ongoing monitoring, usually for the next 12 months.
• Use the direct method where possible, showing cash inflows and outflows. (The indirect method which reconciles cash to the profit and loss statement is less easily understood, although it is a useful control).
• Show cash at start of period (current account and savings accounts only), cash out and cash in, leaving a surplus or short fall.
• Show how a surplus or shortfall will be managed eg, headroom on existing facilities, obtaining increased overdraft, additional loans, sale of investments.
• Use descriptions easily understood by non-financial managers – avoid accounting jargon.
• Clearly document assumptions eg, major customer X will pay Y on date Z, with a probability of P. 

Principle 6: Maintain controls over cash flow reporting

• Reconcile cash flow reports to bank statements and creditor statements and quickly chase down discrepancies.
• Show date and time prepared.
• Ensure reports are reviewed by someone other than the preparer.
• Clearly identify preparer and reviewer.
• Reconcile cash flow statements to profit and loss and balance sheet movements.
• Increase frequency and rigour of balance sheet reconciliations and substantiation to validate cash flow forecasts.
• Check consistency with other management information eg, income pipelines.
• Changes in processes and the implementation of business continuity and contingency plans may impact record keeping, cash controls and the nature of cash movements.

Principle 7: Increase frequency of reporting and consider whether to report on monthly, weekly or daily cash movements 

• Rolling, detailed, weekly cash flow forecasts for 13 weeks out are often used in turnarounds and may be required for loan applications.
• Rolling, monthly cash flow for the next 12 months are usually necessary and again will be required for loan applications.
• Look further ahead if there are known, large payments due, eg, loan repayments.
• Identify process improvements to increase speed of production and accuracy of reports.
• ‘Mothballed’ businesses may have reduced reporting needs but still need to be planning for when business can restart.

Principle 8: Maintain underlying data in as much detail as possible – this enables maximum flexibility in reporting

Make the most of accounting systems – check to see whether relevant functionality is already available or whether add-on modules and apps can be obtained.

If necessary, develop a spreadsheet listing or database of material forecast cash movements to support summarised cash flow reports. Analysing debtors is particularly important. For each item:

• Assign expected, worst case and best-case dates for receipts and payments.
• Show maximum, expected and minimum amounts to take account of disputes and retentions.
• Assign probabilities to likelihood of collection for outstanding debts and success of financing applications.
• Show responsibilities for collection.
• Record notes on assumptions, risks, feedback obtained from third parties and market insight.

Principle 9: Follow ICAEW’s Twenty Spreadsheet Principles when developing cash flow reports and forecasts

• Spreadsheets are highly prone to errors, especially when put together while under stress.
• Principles include, but are not limited to, independent review; separating out inputs, workings and outputs; short and simple formulae; performing calculations only once; rigorous testing; built-in checks and alerts, and systematic backup and version control.