How cash flow forecasts and reporting can help your business through turbulent times

The preparation of cash flow reports promotes good financial management in several ways. Importantly, they gauge your business’s ability to generate cash and use available cash to meet its obligations – both of which are necessary for surviving and thriving amid an economic downturn.

“Put simply, if you don’t have enough money available, you cannot pay for expenses,” says Shuzhen.

The proper tracking of cash inflows and outflows is critical, as it enables businesses to:

• gain real-time insights into their financial position;
• create data-driven cash flow forecasts for nimble, informed decision-making and forward planning;
• identify potential cash shortfalls and take proactive measures to address them;
• capture opportunities for investment, expansion or increased remuneration where excess cash reserves are identified; and
• have transparent, trust-building discussions with lenders, investors and suppliers.

According to the Singapore Financial Reporting Standards, understanding an entity’s cash flows helps users of financial statements evaluate its cash generation capability, needs, and timing. The objective of this Standard is to require the provision of information about the historical changes in cash through a categorised cash flow statement encompassing operating, investing, and financing activities.

Businesses can assess their cash flow situation via the direct method of reporting, which records actual cash receipts and payments, or the indirect method, which adjusts the net profit or loss for non-cash items.

“They can also monitor cash inflows and outflows in their day-to-day operations to understand their net cash flow and forecast future cash availability,” Shuzhen says.

Companies must report their cash flows under three main categories: operating activities, financing activities and investing activities.

“This allows your finance team and stakeholders to understand cash inflows and outflows for each category and make decisions from there,” Shuzhen explains. “For example, investors can decide whether they want to continue investing, depending on their risk appetite.”

Free cash flow refers to the amount of cash your business has after accounting for its capital expenditures.

It can appear on your balance sheet as either:

• Unlevered free cash flow (UFCF) – This is the amount of money your business has available before meeting its financial obligations (eg. debts, expenses, taxes and interest payments). UFCF shows your gross free cash flow and is an important figure for investment bankers, potential buyers and executive staff.
• Levered free cash flow (LFCF) – This is the amount of money your business retains after meeting recurring short- and long-term financial obligations. LFCF shows what cash can be put towards investments and building equity and is of interest to bankers, buyers, internal staff and board members.

Using these two metrics in your cash flow reporting can help you manage your finances effectively and tailor your cash flow statements for particular stakeholders. However, many Singaporean businesses prefer to assess their cash flow based on the liquidity of their assets.

To support financial stability and growth in times of economic growth or downturn, consider implementing the following cash flow management practices within your organisation.