Time Is Now To Get Back In The Driving Seat Of Your Business!
The global Coronavirus (COVID-19) pandemic has caused a shock wave across the business community as companies try to survive and deal with the fall out. Nearly all industry sectors are reporting a significant decline in sales, with some, such as the retail and hospitality, facing a complete closure. Many business owners have reacted with a ‘flight’ or ‘fight’ response in coping with the fall out.
Those in ‘flight’ mode have already exited, or are in the process of exiting, their businesses. The retail sector in particular has been hit very hard with several well-known brand names going into administration, e.g. Victoria’s Secret, Laura Ashley, Oasis, and Debenhams.
Those in ‘fight’ mode are sourcing bridging finance through the government’s Coronavirus Business Interruption Loan (CBIL) or Bounce Back Loan Scheme (BBLS) until business picks back up. But the timing of any potential recovery is uncertain as companies start to lay off significant swathes of their workforces, thereby removing further potential consumer demand from the system. Notable examples are British Airways (12,000 staff), BP (10,000 staff), Virgin Atlantic (3,000 staff). Other lay-offs have still to be announced and the timing of these will further erode business confidence.
Building business resilience is now the key to survival for any business. Building resilience will enable them to rapidly adapt and respond to COVID-19, safeguard people and assets, while maintaining continuous business operations. In the face of a crisis or economic slowdown, it will be the resilient companies that ride out uncertainty instead of being overpowered by it. The key to building business resilience is to get back in the driving seat of your business by getting control of your finance function. We have detailed below some useful tips and suggestions to help you do this.
First stage to building business resilience
The first key to building business reliance is to get control of your cash flow. Poor cash flow is a primary driver for business failure, as an owner / director / manager of a small or medium sized enterprise (SME) are you in control of your finance function? Do you have robust systems and process in place to review progress? Do you know what sort of management accounting you need, if any? These are critical questions that need to be answered if you are to succeed.
SMEs make up 99.9% by number of all businesses in the UK. And 95% by number of all businesses employ 9 people or less (micro-businesses).
A recent Open University (OU) study found that many owners of SMEs are either not aware or not convinced of the usefulness of management accounting for control and decision-making purposes. In support of this finding, a United Nations report showed that improved financial information would help SME owners manage their businesses better and also access finance more easily.
The Institute of Chartered Accountants in England & Wales (ICAEW) found that “Many businesses do not have adequate systems for identifying the amounts of profit or loss generated by different products and services, or even by the business as a whole, yet this information is absolutely essential if the business is to grow stronger”.
Break-even analysis, business ratios, budgets and discounted cash flow, are just some of the methods which can be used to set realistic financial targets and also to monitor progress against those targets. These tools are readily available and can be easily built into a financial model on a spreadsheet using your laptop.
This is of critical importance to plan for the repayment of Covid 19 loans – otherwise you may simply just be delaying the inevitable tough decision of considering business closure.
What are the key management accounting tools are we considering here?
The OU study included;
- Costing of products and services
- Breakeven analysis
- Working capital measures
- Budgetary planning and control
- Cost / profit centres
- Decision support tools such as
- Marginal Costing
- Contribution Analysis
The OU study reviewed seven small (turnover between £750k and £5.3m) and four medium (£7m – £23m) sized businesses and found that all the businesses analysed used costing, breakeven analysis and working capital measures. However, the small businesses rarely used any of the other tools listed above. None of the seven businesses selected used any of the decision support tools.
As a result, the study showed that decision making in SMEs is typically down to the owner’s intuition or “gut-feel”. This is somewhat inevitable as the uncertainty around future cash flows render any formal management accounting tools, which rely such forecasts to operate, completely useless – and we would predict that this degree of uncertainty will be even greater in the current tough market conditions.
The OU study included few, if any, micro businesses which make up most the UK’s enterprises. Our experience in this sector suggests that the use of the management accounting tools is much less widespread. Very often the only management accounting “tool” is the bank statement. It is evident from these studies that appropriate financial management systems are essential to the success of any business.
Budgeting and Planning – why?
It is imperative to put together a business and financial plan (going forward three or five years) whatever the size of your venture. You should do this to plan how you can navigate through the next 12-24 months – and you achieve this by preparing a business plan.
Your business plan should include details of markets served by the business, history, management, product lines, production costs, future plans, etc. The plan will include a projected profit and loss account, cash flow and a balance sheet. Understanding what drives cash flows is vital for any business plan.
Budgets are normally used internally to help the owner run the business, monitor its progress and develop action plans to achieve objectives. Budgets usually contain the same basic information as plans, i.e. forecast of profitability, cash flow and financial position. However, budgets usually deal in shorter timescales and can be broken down into weekly, monthly or quarterly periods. Targets should also be set for the business and these should aim to beat the budget levels.
Management accounting information is compared with the budget to monitor progress and to decide if changes in planned actions are required. A comparison of performance figures with budget, together with key ratios, is often a primary source of information for the effective running of a business. This enables the owner to get a better understanding of the enterprise and establish where he needs to focus his time. Such understanding will also help convince a lender that you know what makes your business tick and they will be more inclined to help finance your venture.
Decision Support Tools
The SME owner typically relies on experience and ‘gut feel’ when arriving at financial decisions on funding or investments. As with budgeting and planning, putting a formal case together to check the owner’s “gut-feel” provides a framework for measuring what future options may bring.
For example, take this simple payback model;
Period Project Actual
Cash out Cash In Cum net Cash out Cash In Cum net
0 -£5,000 -£5,000 -£6,250 -£6,250
1 £250 -£4,750 0 -£6,250
2 £3,500 -£1,250 £3,000 -£3,250
3 £3,500 £2,250 £2,750 -£500
4 £3,500 £5,750 £3,000 £2,500
Payback (periods) 2.4 3.2
In this example, before the expenditure is committed the owner can establish whether the projected payback is satisfactory. If not, he should explore other options – which can include doing nothing. If the payback is satisfactory, the investment is approved, and actual performance should be measured against the project. If necessary corrective actions will be taken and lessons learned for future investments.
In our example measuring the actual performance tells us:
- We have spent more than we planned;
- Cash coming in as a result of the expenditure is delayed;
- Less cash is received than expected;
- Hence, payback is longer than projected at the start.
This is a simple example and in reality, any forecast will be different from actual results. However, the more such techniques are used the better the understanding of cash flows in the business. Future decision making will start to be based on knowledge rather than just intuition – however good that might be!
If you don’t think you have proper control of your finance function, maybe it’s time to get help as your business may be at risk, as this is the first stage in building business resilience. In such uncertain times, establishing a financial plan is the first step to ensuring your business survival and potential to thrive into the future.
Is it time for change?
Speak to your local ICON advisor – it will cost you nothing to grab a coffee and to get a better idea of where *you* can change