Making Sense Of The Numbers In The Current Climate

Issue 67

As an experienced Finance Director, Geoff Maclauchlan of Kingsmere Finance Directors, provides strategic financial and operational planning and management guidance to businesses aiming to increase their financial stability, efficiency and profitability. He continues his assessment of business in the crisis.

Hope Ahead?

Last year I likened the pandemic to an earthquake, wondering when the tsunami would arrive. There are now differing opinions as to whether it will. Through furlough, lower VAT rates and deferred payments, extended bounce-back loans, rates relief and moratorium on evictions, the Government has helped to smooth out what could have been catastrophic challenges for many businesses. The question now is, will there be a crash when this support ends, or will it be death by a thousand cuts, with businesses struggling on until they realise that they are unviable for a range of underlying reasons and eventually give up?

In my previous article, I suggested somewhat cynically that the Government would solve the unemployment crisis by appointing an army to crack down on those who defraud Covid-19 support initiatives. Lo and behold, the Chancellor recently announced the creation of the HMRC Taxpayer Protection Taskforce with more than 1000 new inspectors. Businesses which have not played by the rules or failed to keep accurate records can expect an unpleasant ride in the coming months.

Practical Steps

To survive, businesses must be flexible and agile, ready to seize the many opportunities that will inevitably arise from lockdown freedom. As an essential first step, they must have accurate, up-todate financial information and cash forecasting on a 12-month minimum basis, to identify problems looming and have time to react to them for good or for bad. Many businesses will have made losses, so they should file accounts far more quickly than usual, thereby gaining early corporation tax repayments to boost cash reserves. Casualties will be inevitable, so businesses must closely monitor customers and supply chains. As a safeguard, they should investigate credit insurance and generally be vigilant for signs that companies on which they rely may be facing difficulties. The pandemic has seen a massive increase in business-targeted cyber-attacks. Such attacks can cause insurmountable damage, in terms of direct commercial losses, and also GDPR penalties for data breaches. No business should now be without cyber insurance cover particularly including cyber crime. As I have mentioned before, any business in difficulty can benefit from advice sought early from an Insolvency Practitioner. Rather than putting a business under, most IP’s give pragmatic help and support, using their experience to provide solutions that probably had not previously been considered.

Adversity is the Mother of Invention

Problems and challenges caused by the crises have in turn led to innovative and creative solutions. The more business owners talk to peers, professional advisers and even competitors, the greater the chances of them benefitting from solutions to similar issues others have faced.

For example, mergers may well be the answer in some situations. Combining two firms’ turnover with the equivalent of one’s administrative costs can result in two unviable operations becoming a single profitable one. Exploring a merger or possibly a buyout will usually be more preferential options to facing insolvency.

Reasons to be (a little!) Cheerful

The Recovery Loan Scheme that launches on 6th April will be a welcome boost if supported genuinely by Banks, enabling businesses to restructure finances, restore competitiveness and give themselves a fighting chance at longer term survival. A cautionary note remains breaches of banking covenants. So far, banks have been mainly supportive, but the mood will inevitably change, and businesses must protect themselves by ensuring they have taken every possible step to adhere to their banking agreements.

The main optimism relates to the huge deposits sitting in personal bank accounts waiting to be spent, an opportunity for businesses to cash in. High volume sales are a real temptation after the last year, but this brings with it the danger of overtrading, where debtors pay slowly leaving suppliers vulnerable as they are unable to meet their own commitments. The “boring” disciplines of cash forecasting and credit control are critical.

For successful businesses, there will be a real temptation to take out as much profit as possible in anticipation of higher corporation tax rates from 2023. However, caution is needed to ensure that reserves are not depleted beyond sensible safety levels.

During the crisis, many businesses have adopted a much more focused approach to financial management. As the economy recovers, we must hope that they avoid reverting to their earlier complacent ways. One positive from the crisis, should be that they use what has happened as a salutary lesson and preparation for the depressing prospect of something similar recurring.

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