For SMEs in Australia and New Zealand, 2021 is going to be all about cash.

Never before will you face as much scrutiny – despite being in a period of frightening volatility and paralysing uncertainty. The credit risk of your customers, the flakiness of your supply chain and your supplier terms will all be tested. On the other side of your balance sheet, your bankers and shareholders will need constant reassurance.

It’s time to get on top of your cash-flow forecasts.

My team and I at PwC have built hundreds of cash-flow forecast models for organisations of every size and in every industry, but the things we’ve learned are surprisingly consistent. So here are my top tips for 2021 and “the year of cash”.

Picture 1: 13 Week Cash Forecast Accelerator (click image to enlarge).

1. Take control of your cash story

Banks and other stakeholders often demand a cash-flow forecast model from their customers. But although it pains me to say it, nobody should be under any illusion that they crave a good financial model. They know that to produce an accurate 13-week cash-flow forecast model each week (which is the most common request), a business already needs to have an end-to-end cash culture.

However, you can seize this opportunity by providing your story in the form of a spreadsheet.

The very best cash-flow forecast models capture the key business drivers of your vision and overlay your secret sauce. And, in a dashboard worksheet, they present your business plan in a coherent and confident fashion. If this dashboard is done well enough, the bankers won’t even look at the other calculation and output sheets of the model.

“The very best cash-flow forecast models capture the key business drivers of your vision and overlay your secret sauce.”

2. Why choosing the right model is difficult

If you are about to build your first cash-flow forecasting model, unfortunately you need to start from scratch. By all means look at as many other cash-flow forecasting models for your industry as you can, but once you’ve learnt what you can from them put them away.

Whether a financial model is right for you and your business depends not only on the story you want to tell with your business, it is also highly subjective.

Even if you are lucky enough to trawl through so many models that you find one designed to tell the same combination of organic and inorganic growth and improved cost efficiency story you need to tell, it will still not be the model for you.

We frequently see this when clients introduce a project by telling us, with great frustration, they have an existing model that is badly designed, too complex and doesn’t work for their business.

But when we begin to work through the model we find it hard to fault. As we dig deeper, we discover the aspects that are ‘wrong’ are almost entirely subjective and a personal choice. Nonetheless, they are critical to this client having faith in this model and using it as an effective tool.

3. The problem with template models

I have written extensively on the fallacies of templates, but to extend the above point think about what happens when you build a new home. A builder will present you with a choice of plans that you can tailor in prescribed ways. A template financial model is like being presented with a choice of fully built houses where even the colour of the curtains has been chosen for you. Let’s face it, you will never love that house; similarly, you will never love that model.

4. Direct or indirect? Know your cash flows

A direct cash flow is payments and receipts showing the total cash flow in any category. It can confidently stand alone from a P&L and balance sheet.

An indirect cash flow is driven by the P&L and balance sheet, usually starting at EBITDA, adjusting for movement in working capital, and applying capex, financing and tax. It’s often referred to as a 3-way or integrated financial statement.

5. Being direct – the 13-week cash-flow forecast

The 13-week cash-flow forecast is the classic tool for proving you are in control of your cash. It’s weekly (never daily) and is driven by accounts receivable and accounts payable ledgers and big one-off cash flows.

6. PwC’s 13-Week Cash Forecast Accelerator

In 2020 at PwC, we developed a 13-Week Cash Forecast Accelerator with our global colleagues. We provided it to a number of PwC clients for whom a weekly direct cash flow was a new endeavour – and who needed a kick-start.

The secret sauce of this particular financial tool was the roll-forward functionality, the dynamic variance analysis and the insightful dashboards. This accelerator is a key part of how we are servicing clients in 2021.

Picture 2: Navigation page for Project Superstar - Forecast Model (click image to enlarge).

7. Being indirect – 3-way integrated financial statements

The classic 3-way could be your budgeting model, your corporate model, your planning model, your strategic forecasting model or your investor model. These are all different models and rarely can they achieve more than one of these purposes. Ultimately, every one of them is a cash-flow model.

In 2021, PwC hopes to launch a brand new modelling service for SMEs in Australia. We believe this market needs a completely new approach that uses as its foundation the very best of our experience and financial modelling skills, but produces the model rapidly using a combination of technology (at the specification phase primarily) and a team of model builders.

We will need the support of our clients as we scale this proposition, so we will sell a 3-way cash-flow forecast model for $5k (50% off) to the first five CA ANZ members who represent SMEs with turnover between A$3 million and A$20 million who contact us and commit to test the process.

8. Embed a cash culture

Don’t forget that financiers and shareholders demand cash-flow forecast models because they know they require a cash culture to support them. And, disappointingly, not even the very best financial model can avoid this. Now’s the time to embed cash in your KPIs, in your management incentives, in your sales targets, in your cost reduction targets and your capital plans.

9. Make a strong first impression

Now that you have taken control of your own story, you have a cash culture to support it and you’re presenting high-quality forecasts, for goodness sake don’t fall at the final hurdle.

Every model must open on a cover page, have consistent formatting on every worksheet, be easy to follow, use graphs and guide the reader. Without that, all your hard work will be undone. Every week someone will use all manner of derogatory terms to describe a model to me, for no apparent reason other than it misses these hygiene factors.

If you don’t want to have your model written off before a stakeholder sees the numbers, comply with PwC’s Global Financial Modeling Guidelines (version 3 was released in January 2020). You can download it at bit.ly/modeling-guidelines

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