Return to Business: Preparing and Updating a Business Cash Flow Plan

Return to Business: Preparing and Updating a Business Cash Flow Plan

By Sara Ametrano and Victor Bandiera

 

 

Four stacks of coins increasing in height from left to right, with a jar full of coins at the end. A green upward-pointing arrow is on top of the piles.

Example image of financial increase.

To alleviate individual financial struggles due to COVID-19, the Federal government implemented the Canada Emergency Response Benefit (CERB) program. This initiative (currently in place until October 23, 2021) provides financial relief for eligible employers to cover a portion of their employees’ wages if their business was impacted directly by the pandemic. Now, as the country moves toward a sense of normalcy, resuming regular business operations and repairing the economy, the CERB program is ending.

 

 

What can you do to be ready?

If you’ve received financial support through CERB, putting a plan in place to resume business operations and generating profits is key. Part of your plan should include determining and updating your cash flow forecasts. Keep in mind there is a difference between cash flow forecasts and financial forecasts; where a financial forecast projects expected income over 12 months, a cash flow forecast is the actual cash activity (in and out) on a monthly or weekly basis.

 

Are cash flow forecasts necessary?

Yes. As you create a cash flow forecast, you must understand why the forecast is needed in the first place. History is littered with companies that were growing and making money but ran out of cash when they needed it the most. As your business shifts to growth mode, you will likely have a delay between doing work and getting paid, which could stress your balance sheet. Your cash flow plans are crucial for funding growth, so keeping your plan up to date and as accurate as possible rather than revisiting it on a reactionary basis is crucial. A surety and/or bank may also require this information, so having the figures and plan updated regularly allows you to easily provide any requested, relevant data.

 

Getting started:

To implement a cash flow plan, you need a clean starting point for your tracking period. Consider starting at a month-end, as you should have a good understanding of the current business financial state, including sub-ledgers for accounts receivables and liabilities such as accounts payable, held cheques after reconciling your bank accounts, contract bookings and other payments made.  The starting position gives something to balance to as well, which is very important. The cash flow forecast is usually 12 weeks at first, and then perhaps every month thereafter for a year.

Being organized is crucial for your plan. For example, revenue can be categorized by signed contracts, items still under negotiation or small fill-in work. Using these silos can help to identify various payment term differences, as well as separate any special payment terms like holdback receivables withheld monthly and released after contract completion, which usually results in large cash infusions.

Creating a chart in a spreadsheet could be useful to visualize projected and ongoing expenses and payments as well as any changes. Some things to highlight are sales assumptions:

  • Billing and collection assumptions for each contract
    • Separate the collection of accounts receivable and accounts receivable holdbacks
  • Cost of sales for each contract
  • The subcontractors who get paid when the business is paid by the client
  • Labour costs that are dependent on actual work performed and terms of collective bargaining agreements (if union) or employment/contract terms
  • Equipment costs (third-party rentals) or leases
  • Materials (some suppliers may permit deduction of holdbacks) and prompt payment discounts for early payment if cash flow permits

Many businesses require a bank operating line to help finance operations until payments from clients are received. The ability to access funds from the operating line will be based on the bank’s margining terms usually a percentage of current accounts receivables due within 90 days.

It will also be useful to identify items that cannot be deferred until the business is paid by the client. This list can include:

  • Payroll
  • Fuel
  • Equipment finance payments (interest and principal) or lease payments
  • Canada Revenue Agency payroll tax remittances
  • Workers compensation premiums and insurance premiums
  • Rent or mortgage payments

Cost items should be further broken down based on whether they are variable, fixed or discretionary. Variable items do not follow a set pattern but are dependent on production or sales such as sub-contractor costs or fuel. Fixed items, on the other hand, follow a regulated payment structure, such as rent and financing. Lastly, the discretionary category features costs that are a little “softer” and not directly associated with a specific contract but are still connected to its success, such as marketing.

Once you have completed your cash flow plan, remember to show the residual amount monthly and at end of the period. This is calculated by adding the starting cash balance to your receipts and payments allocated over the term. This might be a buffer over the period and can aid in considering a sensitivity analysis if things go better or worse than expected.

 

Determine workload:

Part of your preparations for resuming normal business operations should include taking inventory of current contracts. Is there an adequate backlog of work? What are the reasonable forecasted profits from the current contracts and estimated completion dates? Are there any current negotiations that may result in contracts being added to the backlog?

Highlight each contract and implement status checks weekly or monthly. Include the following information for each significant contract:

  • Re-forecasts of profitability (projected revenue and costs at completion)
  • Accounts receivable and accounts payable with segregated holdback
  • Any held cheques
  • The amount of remaining unbilled and unpaid work for each supplier/subcontractor
  • Resources required to complete work and their projected costs
  • Start and anticipated substantial performance dates, and therefore, holdback release date
  • Present aging of monthly accounts receivable to give you an idea of collection and payment schedules
  • Overhead: items not included in costs of sale or contract cost estimates; indirect operational costs (communications technology, supervisors, project managers, etc.); preventative maintenance costs and capital repairs versus running repairs of equipment
  • Internal equipment rental expense and true costs including fuel, wearing parts (for example, tires), running repairs (oil changes, radiator flushing, hydraulic oil, etc.), insurance, capital and depreciation including major overhaul costs (engine and undercarriage rebuilds, etc.) and expected return on capital
  • Information regarding debt service and split principal/interest on debt

CERB relief should be shown separately. Do not reduce your payroll costs, as this will just artificially reduce total amounts rather than show a true reflection of cash impact. All associated costs (paid and received) should be precisely accounted for to avoid any breach of trust obligations (if applicable), as per the statutory provincial Construction Act or Lien Act requirements. Items with a past-due status should be included as well. Deferred revenue and any work in progress do not need to be considered when it comes to the cash flow plan, as they are accrual-based calculations.

Having a strong understanding of your business’s cash flow forecast will give you confidence when making decisions around staffing, equipment purchases and when bidding on projects. Also, being able to present and articulate your cash flow plan will provide your lenders and surety with confidence to support the goals you have for your business, which should lead to more leverage and better terms.

If you have questions or would like someone to review your cash flow plan, please reach out to one of the surety underwriting experts at Trisura Guarantee Insurance Company.

 

The views expressed in this article are exclusively those of the authors; they do not necessarily reflect the views of Trisura Guarantee Insurance Company, its affiliates or partners.

Trisura Guarantee a 2021 Five-Star Carrier

Trisura Guarantee a 2021 Five-Star Carrier

By Sara Ametrano

 

Trisura Guarantee has been named a 2021 Five-Star Carrier by Insurance Business Canada. This marks the fifth consecutive appearance for the organization on the annual list.

“Everyone at Trisura strives to create an exceptional experience for our broker partners,” says Richard Grant, Trisura’s chief operating officer. “Being named a Five-Star Carrier for the fifth year in a row is truly an honour.”

The list, now in its sixth installment, is determined based on brokers’ votes across 10 categories. Brokers are asked to rate carriers on a scale of one to five in each area. To be named a Five-Star Carrier, insurers must receive an average score of 4.00 or greater in at least one of the categories:

  • Competitive rates
  • Overall service level
  • Underwriting expertise
  • Range of products
  • Claims processing
  • Quick quotes
  • Appetite for niche and emerging risks
  • Broker communication
  • Product innovation
  • Online platforms and services

This year, Trisura was named a Five-Star Carrier in all 10 categories!

“We are all very appreciative to be recognized in all categories, as we take great pride in our relationships and dedication to your success,” Richard says. “Thank you to all who voted. We will continue to do our best to meet your needs and work together to find solutions for you and your clients.”

In addition to revealing the top carriers, the report also unveiled the areas that are most important to brokers when securing a carrier partner. The three most important aspects are: competitive rates (65%), overall service level (64%) and underwriting expertise (56%). Both competitive rates and underwriting expertise were top-priority items in the 2020 report as well.

To learn more about this year’s Five-Star Carrier list, and selection process, view the Insurance Business Canada article here.