Cash Flow Forecasting – Where Does Your Accountant Fit In?

The role of a company director is to essentially steer the business to a position of strength, both operationally and financially, and tend to company operations to ensure that the company growth rate is on an upward trajectory. As you generate new business and maintain service levels, you will also be required to keep a watchful eye on company finances. From tracking company cash flow to your balance sheet, this combined data will help forecast business performance, and generate a clear warning if you’re likely to run out of cash.

Cash flow is an understated tool that can help the business achieve steady growth, as, without it, your business can quickly tumble into limbo and disable ongoing growth strategies. Enlisting a professional and qualified accountant can aid business performance and maximize your existing investment. In this article, we’ll run through the common red flags to take heed of when operating a business and how by incorporating an accountant, you can reduce the likelihood of your business colliding into avoidable obstructions.

Concentrated sales

If your business is shoehorned into a particular sector due to its historical identity, background and experience, this is likely to be your safe space as it’ll attract reliable income. Branching out of this industry and spreading your offering across multiple sectors can help establish additional income streams. For example, the high profile taxi-hailing service Uber established UberEATS, in 2016. By using their existing operational structure and resources, they were able to extend their offering to the delivery of food.

The coronavirus pandemic has taught us the importance of branching out into a variety of arenas to guarantee income during periods of economic uncertainty.

For example, complimenting a physical shopfront with an ecommerce platform through which customers can also shop can increase access to your products on a global scale. In the event of unexpected store closure, you can continue service delivery without interruption and depend on your customers to support you throughout unprecedented trading events, such as the coronavirus pandemic.

By dispersing your customer base across multiple sectors, you divide the risk, rather than concentrating sales into one basket. Your accountant can work with you to assess your dependency on selected clients and the level of risk they pose to your cash flow. Tracking their historical payment patterns, such as late payments and payment extensions, can also demonstrate how this can impact long-term company cash flow.

Credit control

During the lifecycle of your enterprise, you may extend credit to customers and suppliers, as standard. If your business holds a large debtor book and therefore faces a high debt risk, you may consider tightening credit control measures. This can speed up the payment of outstanding invoices and ensure there’s a dedicated credit management team on hand equipped with debtor collection experience.

Poor credit control can weigh down on cash flow which is essential for business maintenance, investment and development. Your accountant will actively track your debtor book, and may use cloud accounting software to flag outstanding invoices and send payment reminders like clockwork.  

Reputation

As an enterprise, a damaged reputation can pose as your largest threat as it holds the power to topple turnover overnight, eradicating both prospective, existing and returning customer bases. If your business reigns over a substantial share of the market, operating responsibly and actively taking heed of your ethical stance and social position is essential. Acting irresponsibly can attract negative publicity, adversely impacting your commercial standing with investors and crippling your relationship with customers.

In 2020, online fast-fashion retailer, Boohoo, was embroiled in a payment scandal that led to £1 billion being wiped off its value on the London Stock Exchange. Evidence gathered from an undercover Sunday Times reporter found that Boohoo paid workers in their Leicester factory less than the National Minimum Wage.

Operating transparently is essential, and as a commercial B2B or B2C entity, your corporate social responsibility efforts will influence buying decisions for customers and shareholders alike.

Your accountant will be able to advise you on business performance trends and whether this corresponds with media activity, corporate social responsibility exercises and the implementation of new policies.

Cash flow and balance sheet test for insolvency

Your accountant will be able to conduct a cash flow and balance sheet test for insolvency if there are any suspicions that your business is underperforming, or likely to experience financial difficulty. Assessing company cash flow can track if the business is likely to fall short of funds required to fulfil essential payments, including COVID-19 loan repayments. If you can’t pay your Bounce Back Loan or Coronavirus Business Interruption Loan, which was made available to UK businesses during the pandemic, you will need to conduct a cash flow assessment. Similar credit facilities were offered to businesses across the US and Canada.

The balance sheet test will track company liabilities against company assets, including machinery, equipment and intellectual property. If your business has more liabilities than assets, it may be contingently insolvent. You’ll also need to seriously consider your bad debt prospects as if there’s a high probability that payment will not be made, this should be reflected.

Upskilling your existing finance team and appointing an accountant can increase the number of support options available to your business as any discrepancies will be addressed in the first instance. An accountant or licensed insolvency practitioner will be able to provide live progress reports to ensure your business is on track, or whether the risk of insolvency lies ahead.