Cash Flow Problems – Turnover Under-performing Forecast 4/8

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In the fourth of a series of eight blogs, our banking experts are looking at common cash flow problems that businesses encounter. In this blog, Colin Burns discusses what can happen when turnover is under-performing forecast. Creating accurate revenue and growth forecasts can be tricky. But getting it wrong can lead to cash flow problems and difficulty raising funds.

What causes forecast under-performance?

Revenue and growth forecasts are vital for determining what you can afford to do and showing investors what you need in order to get to where you want to be. Forecasts also help you avoid the cash flow shortages that can hinder your business performance.

Forecasting allows you to determine what your estimated sales will be for a given period. The forecast is generated from an analysis of previous data about your sales, the sale of similar products by your competitors, and market response to your offerings.

However, many business owners can easily get it wrong when trying to build a sales forecast. Being overly ambitious is a common mistake. Another mistake we regularly see is a failure to regularly update forecasts to reflect market shifts and what your competitors are doing in areas such as product development.

Also crucial to accurate forecasting is having a predictable sales and marketing process in place for finding, converting and growing sales from customers. Having a systemic process will provide useful data in how your sales teams are converting opportunities into cash. It can be all too easy to offer excessive discounts to achieve sales targets, which may compound cash flow shortages.

What are the key indicators?

The following financial indicators can help you identify if turnover is under-performing forecast, enabling you to spot warning signs and prevent any long-term damage to your business:

  • Actual versus budget sales figures.
  • Reducing gross margin.
  • Customer attrition rates.
  • Reduced orders levels from regular customers.
  • Deferred (but not lost) sales.
  • Reduced market share.

When faced with turnover that is under-performing forecast, these are the steps that key stakeholders within your business should take:

Role of the MD/CEO

The MD needs to take control of the emerging situation by:

  • Reviewing sales performance with the sales team.
  • Reassessing the achievability of original forecasts.
  • Speaking to key customers to ascertain reasons for reduced order levels.
  • Sounding out key employees on their opinion of sales under-performance and any suggestions to restore sales levels.

Role of the FD

The FD needs to take responsibility for identifying internal and external solutions to protect cash flow by:

  • Working closely with the MD to undertake root cause analysis for the under-performance.
  • Preparing a re-calibrated forecast with realistic and achievable numbers supported by full buy-in from the sales team.
  • Closer interaction and communication with the sales team.

Role of Ops/Sales

The Sales and Operations teams need to support the MD and FD by:

  • Reconsidering what sales numbers are realistically achievable with the resources available.
  • Contacting all regular clients to gauge future order levels.
  • Assisting in the preparation of bottom-up re-forecasting.
  • Ensuring that there are no manufacturing or production bottlenecks which might hamper sales by preventing finished products being ready at the right time.
  • Ensuring the sales proposition remains relevant and competitive in the market and adjusting if required.

Key points

It is vital to conduct root cause analysis to understand the probable causes for under-performance and formulate a turnaround strategy. Always challenge all forecast assumptions based on historic experience of client order levels and sales performance. Time would be well spent to consider strategies for developing new markets, customers, or your proposition. Review your product pricing structure and compare against your competition and assess whether you are charging enough or too little.

I hope this blog has provided some useful tips on what may trigger cash flow problems caused by turnover under-performing forecast and how your teams should work together to mitigate any long-term damage.

If your business is facing a similar cash flow situation, please do feel free to contact me, I’d be delighted to help.

Colin Burns – Director, Shaw & Co

Colin is a Funding Advisor at Bristol-based Shaw & Co. He is part of one of the largest corporate finance advisory teams in the South West. He is a fully qualified Chartered Banker and Green Finance Certificate holder. Over the last 15 years he has arranged facilities in excess of £250m in over 20 MBO transactions including small owner managed businesses and listed corporates.