Secure your business’ future and plan your cash flow today

As the Government begins to reduce its support for businesses impacted by the COVID-19 lockdown, Richard Simms of FA Simms explains how using this time to plan your cash flow now will help you in the future.

I do not want to ignore or in any way brush over the huge impact of the coronavirus pandemic on us all. The pictures of great sadness are counter balanced only by the superhuman efforts of others.

However, let us focus on business – your business. You will have formed your own opinions about the Government support packages but this support has no doubt enabled many businesses to stay afloat so far. Nonetheless, there is still a long road ahead. What is important is that businesses are getting all the help they need to be able to adapt to this new environment and move forward in the best shape possible.

There could be a substantial peak of avoidable insolvencies if action is not taken. Government support is easing back, and businesses face potentially months of heavily restricted trading conditions. I am urging you, business owners and managers, to use this time to plan and analyse for what lies ahead. Accurate information will be vital in allowing your business to adjust to life after lockdown and the withdrawal of Government support. Coping with a potential societal change in behaviour after coronavirus is going to take creativity and flexibility. You may need to develop completely new business models to enable profitability in a post COVID-19 economy. The more we can all draw on each other’s expertise and insights, the better.

From mine and my team’s discussions with business owners over the last few months, you won’t be surprised to hear that no one has said: “I saw this coming and I was completely prepared for it.”

Although there is an obvious commonality in the underlying cause, how you are being affected is diverse. There is a challenge in our discussions – how to tell whether a business was already facing financial difficulties on a significant level before the current crisis. From conversations with financiers, it is evident the same challenge of determining the financial strength of a business before coronavirus is one of the reasons why many applications for finance have been turned down.

Cash is king!

Understanding the cash flow cycle and being able to model scenarios, helps businesses to understand their cash flow needs. It is not only about profit right now; cash is the key driver in the current economic environment.

Quite a few businesses find themselves in a place that they have not been before. ‘Normal’ is unlikely to resume for a while so you must be prepared, and you must have a plan. Many businesses have deferred creditor payments over the last 10 weeks but have not planned for how these will be caught up. Some HMRC payments have been deferred to next year. 

The important point is that all businesses need to have a working cash flow model to see how their business is going to unfold over the remainder of 2020 and into 2021. Linking together trading receipts, creditor payments, HMRC payments, loan payments, director drawings and ensuring there is still sufficient working capital in the business to continue trading.

A cash flow forecast helps business owners and managers to foresee their future liquidity requirements and to proactively respond to changing market conditions. It is built on a set of assumptions and is only as good as the assumptions that are used. You can bring in and change around many types of internal and external transactions to create various scenarios – both positive and negative. Many of those assumptions will be based on historical events for example patterns of trading or upcoming expenses. The cash flow forecast will show you whether your business will be able to meet expectations. By comparing your actual income and expenses with your forecast, you will be able to see which areas are under (or over) performing and react as necessary.

As your business moves forward it is important to change the forecast as the reality differs from what has been forecast. For example, a customer pays their invoice later than expected or sales are greater than expected, that may mean a payment to a supplier is forced back or bought forward.

The difference in an effective cash flow is moving from responding to cash flow to managing your cash flow.

For cash flow forecasting to help a business to look ahead some key decisions will need to be made. By that I mean that having 20 different forecasts will help with decision making but the ‘most realistic’ forecast will need to be chosen to allow a business to move forwards. That decision may change as forecasts become reality but without planning there is a risk that the business stagnates and does not move forward at all.

Relaxing of wrongful trading

The relaxation of the wrongful trading restrictions during the pandemic are to allow businesses to avoid the need for insolvency at a time when there is great uncertainty over their future. These changes are yet to be tested and where a company can be shown to be insolvent before coronavirus, it is not expected that the changes will protect company directors against wrong trading allegations before the pandemic. The COVID-19 relaxation of wrongful trading insolvency laws was retrospectively applied from 1st March 2020.

This is no doubt a positive move on behalf of the Government and one that I am sure was not taken lightly. It will be interesting to see when this relaxation will come to an end.

The good news is that this allows businesses breathing space to review, assess and rebuild.

I have not seen much about paying dividends from a company during the relaxed wrongful trading rules. If a company is insolvent, it should not pay dividends. What I can imagine is that a company can be insolvent and not be criticised for wrongful trading but is still insolvent for the purposes of payment of a dividend.

This is another area that you must be aware of to ensure that dividends are not being paid if there is a risk that a company could be shown to be balance sheet or cashflow insolvent.

How will we be affected longer term?

It is entirely possible that the UK economy will – though it may not seem possible today – be stronger in the mid-term. To flourish in the future will require innovation both in terms of the use and development of technology but also in working practices. Being open-minded, prepared, and willing to adapt to the changing environment that is ahead of you will be crucial.

Richard Simms, the Managing Director at F A Simms & Partners, is a chartered accountant, a licensed insolvency practitioner and an anti-money laundering expert. As well as owning and running FA Simms & Partners, he has established a company called AMLCC, which supports more than 7,500 UK accountants and bookkeepers with their anti-money laundering requirements. 

 

Date published 10 Jun 2020 | Last updated 10 Jun 2020

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.