Given the interruption caused to businesses by the social distancing measures and the closure of non-essential business premises, business owners and decision makers are having to consider the impact that this has on their business and what actions will need to be taken to protect its’ short and long term future.
Financial projections are key
Financial projections will be vital for business owners to understand the implications that Covid-19 might have, what measures need to be taken as a result and what the business might ultimately look like in a few months or a year’s time.
These projections may end up being only for an internal audience, but given the anecdotal statistics on applications for funding – one in three of you could be using the projections for quantifying the amount of external funding being sought.
Unfortunately for decision makers and those in a finance role, there are currently more unknowns than ever which will make this task frustrating and problematic for those involved.
Top tips – a baker’s dozen
To assist you at this time, I have compiled a list of useful hints and tips from the practices that I and my colleagues are deploying when assisting our clients with the financial projections. I also highlight the financial modelling implications of some of the key business support measures announced by the government (of which more in depth information can be found on our webpage here).
Normally I would start this list by asking you to consider the purpose and target audience of the projections; specifically are they for internal planning only, or perhaps going to third parties in order to raise finance? But in this environment I would probably make sure that they are in a format suitable for sharing with third parties:
- Remember that projections are only ever going to be a best guess. So:
- Do not fret over figures being exactly right (whilst making sure that nothing is significantly definitely wrong!)
- Make sure your projections models are easy to update for changes in key variables (see below)
- Document assumptions
- Create/use a template for the projections that separates out data entry from the production of the profit and loss account, balance sheet and cash flow forecasts. Ensure that the template integrates update of those three statements. For example, if you change assumed sales in a given month and/or cash collection of those sales, ideally you make the changes to your inputs and the key statements are updated
- Start populating the model with the things you know e.g. current balance sheet and previous projections/estimate of what the businesses’ profit and loss account would have looked like if not for Covid-19
- Consider the implications of Covid-19 on your business. We have taken the approach of starting by considering the impact on the significant profit and loss captions in the immediate future e.g.
- Sales reduced
- Cost savings?
- Government interventions (see further below)
- Make broad assumptions about years 2 and 3 in your projections which could be a return to normality (being pre-Covid figures for Year 1?)
- Make sure you consider the cash flow implications of all balance sheet captions. You may decide to leave some balances as ‘brought forward, carry forward’ throughout the term of the projections but make sure that is a conscious decision after due consideration
- Fully consider the cash flow implications of your working capital cycle and sense check debtor days etc. to historic performance
- Do not forget about capital expenditure, debt servicing costs and tax (on profits and VAT)
- Project beyond the next 12 months – to give you a clearer idea as to funding requirement and debt serviceability (if applicable)
- Where you have modelled some of the Government’s business support measures, make sure you consider the cash flow implications:
- Coronavirus Job Retention Scheme – you pay the furloughed employees and then reclaim. Best guess as to when HMRC may be making reclaims? We are currently modelling repayments a month in arrears
- Grants (SBGF and RHLGF) – should be with the qualifying businesses by the end of April
- Business rates holidays – take care to ensure you separate out business rates from water rates
- The deferral of VAT payments – take care to only carry forward the liability due for payment in the qualifying period and to include repayment of the amount deferred by 31 March 2021
- Coronavirus Business Interruption Loan Scheme – interest payments after year one will be different
- Consider the risk factors that could prejudice achievement of the projections and model a couple of alternative scenarios e.g. reduced sales
- Take a step back, consider if the resulting profit and loss, balance sheet and cash flow forecasts appear reasonable
- Double check the modelling assumptions to any narrative that will accompany them
As mentioned in our our blog on preparing for a CBILS application, we would strongly recommend that the projections are accompanied by a funding pack and we have a proforma (for Covid-19 funding applications) that we are willing to share with any client who requests it. Our team have found it useful themselves when working with a number of clients – in terms of structuring their thoughts and as aide-mémoire to ensure key aspects are covered.
Please do get in touch on this or if you have any other questions on funding and grants in particular.