A colleague of mine when discussing cash flow, once used the great analogy of a business being an engine and cash, the fuel that powers it.
A really nice analogy, and one that works on a number of different levels. Just like an engine, a business uses more ‘fuel’ when it is just starting up or accelerating (moving forward / growing).
Engines use most fuel when powering a vehicle over rough terrains, such as an uphill climb or a journey through boggy marshland. For many management teams, the pandemic and post-pandemic trading environment will be the most difficult terrain they have ever faced and hopefully ever will.
In August 2020 the UK officially entered the steepest recession ever recorded. Most economists and industry leaders believe we are not through the worst and that businesses face more challenging terrain ahead and unfortunately probably a steep uphill climb.
The pandemic affected all businesses differently, some were forced to shut overnight others were able to trade but at a reduced level, often at a loss, and a fortunate few relatively unaffected or even benefiting from the pandemic.
The government’s relief packages hopefully provide the UK economy with a ‘rolling start’, reducing the overall impact of the pandemic but also allowing them to recover more quickly.
Interestingly, a lot of businesses we work with seem to have been in that middle ground, operating but at a reduced level, and some are seeing positive results with profits upon budgets and improved year on year comparisons.
In most instances, the improving profits are from management teams consciously reviewing discretionary spend and cutting costs accordingly. We have seen a reduction in marketing and R&D spend, as well as many seeing a reduction in office and travel costs. The use of government reliefs such as rates holidays, grants and the Job Retention Scheme, for many, have provided welcome cash injections.
Management team’s quick actions have meant many indirect income-generating staff, such as admin or marketing teams have been furloughed. This is of course only a short term solution and detrimental in the long term. These costs are easily cut for a short period but it is likely to be unsustainable in the long term with a possible impact on brand awareness or compliance.
This then begs the question, what happens when these reliefs aren’t available? When the furlough scheme comes to a close, rate reliefs end and tax deferrals are due to be paid; just as capital and interest payments are due to begin to repay Business Interruption and Bounce Back loans?
One thing is certain, cash flow management is going to be absolutely crucial in this period so management teams should review their outgoings, stay close to their credit control functions and complete enhanced due diligence on new clients. Late payment and bad debts can cause huge disruption to a business’s cash flow. Statistics show that unpaid invoices in the UK rose by around 200% due to the pandemic. At its peak at the beginning of May 43% of invoices were outside of their contracted terms; meaning a huge amount of money is caught up in the ‘credit cycle’.
With businesses trying to hold on to their cash as long as possible and reduce their working capital cycle, it is likely credit terms will be stretched with payments to suppliers being delayed where not pro-actively chased.
My team and I specialise in helping businesses to adapt their systems and processes to be more efficient and to use the latest technology available to automate tasks allowing resource to be better utilised.
We are seeing a huge amount of businesses adapting to the post-pandemic landscape by outsourcing many different areas of their business. Outsourcing brings with it flexibility, agility and access to a superior skill set. My team can allow you to either outsource your full (/or part of) your finance team; be it the day to day record keeping, payroll or credit control.
By introducing automation to the business’ processes we can offer a complete service which is often more cost-effective but also provides flexibility as the business needs change.
As part of our Virtual Financial Controller Service we can provide real-time data capture and processing, allowing us to produce management reports and analysis on a timely basis as well as cash flow forecasting so that business owners and management teams can closely monitor the business’ financial position, performance and future outlook.
As a direct response to the pandemic fall out, we have introduced our automated credit control service. A low cost but highly effective service, undertaking your normal credit control functions such as issuing statements, invoice chasing ensuring you are on the top of the ‘to pay’ list, and importantly providing credit risk analysis on possible new customers.
Together with our existing credit control service and Escalate dispute resolution and debt recovery service, we are able to offer complete debtor management and collection solution, suitable for all businesses.
Hopefully, it’s not long until we get back to some form of normality, and the outlook looks far more economic!
This blog was written by Lee Sharman, Senior Manager, Outsourcing. To understand more about how outsourcing your finance function can benefit your business, or for support in negotiating the post-pandemic economic environment please contact Lee Sharman or your regular contact at Price Bailey using the form below.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.