Holding a mirror up to your business

In May's edition of Northern Insight (page 24), Geoff examines the importance of having current financial information to gauge a business’s health.

Finance Director v External Accountant

The roles of an outsourced FD and a business’s external accountant are very different. The latter focus mainly on a business’s history, producing a set of year-end numbers relating to several months earlier. They also focus on tax. However, what many cannot do is inform the business where they are at present, nor where they are headed. When looking at a new client, it often becomes apparent that they don’t have accurate and up-to-date records, often because year-end adjustments have not been posted into the accounts. These can be significant changes, correcting errors made during the year, or reflecting tax and other provisions. Inability to interrogate all financial information is of real concern in the current volatile economic climate.

Does the move to digital provide an accurate snapshot of a business?

Digital platforms such as Sage and Xero provide a snapshot of current trading –sales, purchases and overheads. However, if opening balances are incorrect, the balance sheet may well differ from the reality, and can possible be so distorted as to be either meaningless, or more worryingly, lull the Directors into a false sense of security. Even with invaluable and ever-evolving digital tools, the failure to monitor bookkeeping basics can create a worrying picture.

Why this matters to businesses

Without accurate financial information and working cash flow, those running businesses will not know when the money is going to run out, and are unlikely to be prepared for unexpected challenges, of which there are plenty at the moment - war in Eastern Europe, National Insurance hike, raw materials and utility price increases. Businesses need robust financial information to decide if inflationary pressures can be passed on to customers or if they will have to be absorbed, reducing their own margins. Many businesses are also facing the repayment of Covid loans and the ending of Covid protections meaning that landlords can now take legal action against tenants.

Using the analogy of people developing medical problems, they don’t consult a doctor because they are worried about what the diagnosis may be. If they sought medical help early, the problem could possibly be resolved quickly with minor treatment. The longer it is left, it can become too serious to
cure. The same applies with business finance - there are solutions to problems which businesses often aren't aware of, which Insolvency Practitioners for example can deploy, including acting on behalf of the business to negotiate with creditors or to work out a restructure. However, if businesses approach these professionals too late, then they will have missed the opportunity to benefit from their help and expertise in exploring alternative exits or other solutions.

What practical steps should businesses take if they are unclear on their financial situation?

To repeat - it is vital that businesses are aware of their current position, not simply looking at the year-end accounts for much can have happened in the months since then. This information needn't be hugely comprehensive or expensive, but it must be accurate. As highlighted in previous articles it is important to have a cashflow forecast to cover the next twelve months. Thirteen weeks used to be a common recommendation, but it is no longer adequate given the imponderables which
now exist. To meet the challenges ahead, business owners and managers should have an open dialogue with their external accountants, lawyers and finance professionals, exploring options well in advance, rather than waiting for the ‘axe to fall’.

Given the challenges business faces at present, financial management based on accurate and timely information has never been more important. This may not necessitate a full-time Finance Director, just a resource which assists on a regular weekly, monthly or even quarterly basis, ensuring that this essential information is available, showing how the business is doing and where problems may be developing.

A few further tips

Against this background of uncertainty, it is important to remind business owners of the value of credit insurance, ensuring some protection against the failure of larger customers.

They should also consider with their broker or insurer the reinstatement value on premises. As construction costs have increased massively, there is a real risk that if a building was destroyed by fire, existing policy levels may not cover the loss.

Currency protection is another issue that exporting and/or importing companies should be considering given current global volatility. Certainty over cost or sales value can create reassuring peace of mind.

Cybersecurity was already a major issue, but Covid has led to increased frequency and extent of cyberattacks. Businesses must ensure they have robust protection, backup systems and contingency plans in place against ransomware, (which is now the most common form of attack) or other intrusion. It is also important to test these precautions, not just relying on a written plan. Many businesses don’t restore from their backups to make certain that they work. In addition, every business should have cyber and commercial crime insurance. It's not expensive, but is an essential protection given the potentially catastrophic impact of a successful cyber-attack.

For further details contact Geoff at gm@kfdl.co.uk