Now, more than ever, businesses need to actively monitor their financial resilience by producing and reviewing management information. Across the spectrum of businesses, management information is crucial when it comes to monitoring performance, assessing and minimising risk, making investment decisions and providing external oversight.
A business that’s backed up by solid financial management processes is well positioned to make better-informed decisions, and producing accurate and up-to-date management accounts significantly speeds up the production of annual accounts. It also gives funders, shareholders and other stakeholders critical confidence that you’re in control by providing insight into the current financial health of your business; tracking key performance indicators such as sales trends; carrying out customer analysis; and looking at costings, margins and overheads.
Relying on regularly checking your bank balance is not enough. Develop simple profit-and-loss accounts and balance sheets and, if in doubt, ask for help from your accountant or a professional adviser. We frequently see directors and business owners who look at their pipeline, consider what the potential orders might be, check their bank account balance and assume that they are therefore in control. But this is a very risky approach, because it fails to take account of extra costs, loan repayments, unpaid debt including HMRC arrears, and delayed rent or mortgage payments.
Back to the basics on cash flow
Cash flow is the lifeblood of any business, and optimising working capital can make the difference between success and failure. With the future still uncertain, it’s time for businesses of all sizes to go back to basics. And that means assessing whether they are profitable on a day-to-day basis and making sure they have sufficient working capital to meet ongoing financial commitments and support any investment and expansion plans.
Whatever kind of business you run, you need to assess your cash requirements, particularly as your working capital requirements may well have increased as a result of the unpredictable economic conditions. And it’s vitally important that your cash flow forecast covers both the short and medium term. Here in our Financial Advisory team, we’re telling businesses that at this stage they should be looking at a forecast through to 31 March 2021 as a minimum requirement; and as we move towards the end of the year, we‘d advise businesses to be forecasting to the end of June 2021.
Your cashflow forecast should also be sensitised to what you’ve learnt from the current market and backed by a solid understanding of the level at which sales or costs make cash tight. In these extremely challenging times, where there is so much uncertainty around, the cash flow forecast will be the most important tool you have to ensure your business remains as resilient as possible.
Operating without a cash flow forecast is a bit like driving with a blindfold on: it leaves businesses – and directors - in a challenging and potentially dangerous position. Make sure the underlying assumptions that support your forecast are honest and realistic, and if you can’t draw on the skillset or experience in the business to produce this critical tool, ask your accountant to recommend somebody with the right expertise to help.