Since the start of the lockdown, small businesses have been encouraged – almost on a daily basis - to prepare a cash flow forecast to determine if and when they will run out of cash.

Lenders are requesting ever more detailed information to support an application for a CBILS loan, including a forecast of how and when the loan will be repaid.

But how can a small business owner know? It depends on how long we are in lockdown and not even the experts can agree on that, so how can you prepare a forecast?

Our minds evolved in a world where change moved at the cyclical pace of the seasons. Many of our most important cultural rituals are linked to the slow, predictable shortening and lengthening of the day through the year. We are geared to expect that each year will be pretty much the same as the last.

But if our most fundamental assumptions can fail overnight, everything changes.

Accountants are especially vulnerable—what is the value of all our budgets and forecasts and planning in an unpredictable world?

Right now, the idea of preparing a budget and cash flow forecast seems almost impossible. How can we make new plans or forecasts today when we’re still in the middle of the pandemic, and the medium- and long-term consequences can only be guessed at? We can try to estimate, but we have nowhere near a comfortable level of certainty.

Fortunately this is not the point.

A forecast is just that; as estimate of what might happen based on various assumptions not what will happen. And it is a dynamic, not a static, tool which should be constantly updated as circumstances evolve and alternative scenarios are possible.

The good news is that the tools we need for this such as scenario planning and financial modelling apps with flexible assumptions are out there now.

It’s not easy, because applying these tools and practices properly takes a high level of skill and discipline if they are not to become one-off paper exercises.

It also takes time. If a forecast is to be revisited regularly, people need thinking time – a rare commodity in good times - to do it in; even more time is needed to scan for, consider and digest changes to key indicators, both inside and outside the business that might signal shifts between scenarios.

This is where organisations that have optimised only for efficiency may find themselves in trouble. After decades of building what was tellingly called “lean” businesses, the world may be about to rediscover something our ancestors knew all too well: when the famine strikes, it’s the lean who are the first to die or as Tim Rice wrote “What you saw in your pyjamas was a warning to your farmers”.

Maybe we got our metaphors all wrong. What we dismissively called “fat in the system” may have been a good thing after all.

Many smaller businesses, of course, haven’t had much choice, particularly since the financial crisis. But over the next months and years, as the world moves through this crisis towards recovery, we will all need to consider how we organise ourselves to maximise our chances for surviving the next one. A plan and forecast of what this might look like would probably be a good starting point.

Stay safe

Noel Guilford