Though the pandemic continues to unfold at a varying pave throughout the world, on March 28, China witnessed a turning point. Wuhan, the epicenter of the crisis in the PRC, lifted its two-month lockdown, reopening provincial borders and allowing business to resume. It would appear China is in the middle of a “recovery” period, where public health measures are loosening, and economic activity gradually returns.

This “recovery” phase is still a period fraught with uncertainty. We do not know how long it will take to return to normal, and as mentioned in our second installment of the crisis planning series, many businesses will be facing a “new normal” in their industries. The pandemic has altered consumer behavior, while the disruption has seen many companies permanently shut their doors. Owners may be coming back to a different market than the one before the crisis.

In the “recovery” phase, it is time to assess the state of your company and leverage the measures laid out during modeling/planning to get your business back on track.

Resources assessment
Many companies are just returning to business, maybe a lot of these do not have an idea of how affected they were from the lockdown. The first thing to do should be an assessment of company resources, including cash, inventory, staff, production resources, supply chains, etc.
Inventory assessment is vital for manufacturing, trading as well as food and beverage companies trying to get back to normal as quickly as possible. You need to know what you currently have to purchase and produce for the increasing demand. This assessment is doubly critical for businesses with products that have an expiration date. A thorough check on the state of perishable inventories is tantamount to surveying the damage; assuming there will be stock that you will need to let go.

Sometimes your clients are ready to buy, but the constraint is in the supply side. Recovery does not mean that ALL supply chains are back on track. An assessment of raw material inventory and even consumables used for production is required before you can take appropriate measures.

Cash budgeting
While a holistic and comprehensive projection of the company is essential to ensure medium- and long-term health of the business, many strategic models do not do well with forecasting of short-term cash requirements. Often, the shortest interval that a model would deal in is one month. As the recovery period is still an unstable environment, day-to-day cash will need to be monitored closely.

What is a cash budget?
A cash budget does not need to be elaborate or represent long-term plans (or even much cause and effect – this should be covered in your main forecast). A simple and straightforward Excel spreadsheet should be more than enough. It should represent (1) cash balance; (2) cash inflows; (3) cash outflows. It is, however, essential that this is rolled-forward every week.

Simplicity and precision are hallmarks of proper cash budgeting, unlike a longer-term model that strives for accuracy and focuses on representing causal relationships. The cash budget names, times and categorizes each inflow and outflow.

How to create and maintain a cash budget?
Comprehensive treatment of all inflows and outflows according to “best estimate” is key (e.g., no zeroes for unknown values). Expenses are easier to estimate because we have greater control over them. Payments from customers, on the other hand, are driven by assumptions. It is important to be realistic and even tie outflows to inflows conditionally (for example, the finance department can earmark certain large inflows as internal triggers for specific outflows to ensure that cash-out does not outpace cash-in).

Create a template budget with three interlinked sheets:
1.projection sheet: the cash budget itself;
2.actual sheet: a combined data table taken directly from bank statements and the cash journal with a column for item-by-item matching to the projection sheet;
3.a comparison sheet: offering a variance analysis.

The “Roll-forward”
Reviewing the budget is another crucial step. We recommend conducting it together with the “rolling-forward” of the budget for the next week. A timely review of last week’s assumptions will not only ensure carry-forward into the next budget but will minimize future variances, leading to more efficient planning. The review and roll-forward of the budget is, at its best, a joint exercise, with the finance department actively engaging all other departments in the organization to gather their assumptions.

Using the cash budget for course correction in the strategic model
The other level of review for the cash budget (which can be monthly or quarterly) is the reconciliation between the cash budget and the model proper. The cash budget focuses on the short term, and it captures the cash impact of what is happening with some level of precision. Its predictive value is beyond 8-12 weeks; however, it makes no real attempt to represent causality.

The goals are to ensure the protection of the business against an immediate cash-flow related threat, and it can also serve as an instrument for implementing financial control (especially in SMEs). That said, the cash budget can and should be deployed to inform and improve the medium- to long-term business plan (the model). In this way, the cash budget becomes a handy tool for course correction, measuring how far the model is drifting away from reality, and showing where to review assumptions to ensure its accuracy and applicability.

Cash budgets are essential tools for businesses, even under normal operations. During times of crisis, when cash can be tight and reserves may go into free fall, they quickly become mission-critical.