Today's guest blogger is Shaun Ellis. Shaun is an experienced Financial Controller and has extensive experience of cash flow forecasting and treasury management, gained in Joint ventures, SME’s. His most recent assignment related to the sale of a private business. Over the course of his career to date he has worked for FTSE100 companies and overseas. Shaun has been a Corporate Sector panel member for eight years and is currently Vice-Chair. Shaun specialises in business planning and modelling.
In March 2008 I wrote “from the chair” and advised that the coming year would be a busy year for accountants. I had thought that my views were pessimistic as I wrote that easy credit was no longer available even for the banks; I did not expect the banking system to bring itself so far to its knees that they would require government bail-outs. My prediction that the house-price bubble would finally burst did not reflect the impact upon the construction industry. My worry is that the finance departments are still struggling to understand the economic impact upon their own organisation and that more bad news is yet to come out, and worse still that they are still in a state of denial.
I am sure that the audit profession is painfully aware of management representations and independent valuations of stocks, property and agonising over the “going concern” principle. The time to sign accounts will be a nerve-wracking time for the Finance Director and Senior Partner as the economy is almost unpredictable.
But these are still long-term issues and the reality of funding an organisation is essentially a short-term issue. My prediction in March 2008 was that the accountants would be busy with the re-forecast and the cash-flow model, in this I was, by current market reality, optimistic: optimistic in that many companies do not revisit the annual cash flow!
(source: KMPG)
The research on company cash flow forecasting is not indicative that the majority of accountants are in fact aware of the importance of cash flow to the company. In a survey by KPMG: 7% of companies did not perform a cash flow forecast; over 50% relied on long term annual forecasts; 12% would forecast when funds were low; 28% use short term forecasting techniques. It is these short term forecasts that are advised in the current economic reality, a regular 13 week rolling forecast focuses upon the payment and income cycles, and yet the evidence is that less than a third of companies are making use of them. Why is that? Most companies will be advised to challenge everything based around cash flow. Cash is King! We have trotted this out in exams, at dinner parties and in the pub, but today it is even more painfully true. The flow of cash, or lack of it, has brought down Woolworths and Zavvi; the complexity of the business model supplying CD’s and DVD’s to both of these retailers will be an MBA case study in future years and will make fascinating reading.
It is to cash flow and the cash tied up in the balance sheet that finance teams should now be concentrating upon. In each of the key ratios underpinning the “Quick ratio” determining “going concern” the FD will be keen to tip the balance of cash in their companies favour. The hardening of the arteries of credit from the banks will force companies to review their financing, and their policy of extending credit terms to customers. Credit controllers should be reviewing their customer base critically, alert to even the slightest change to the normal payment terms. Again on this subject it is not always the case that proper credit checks are made before extending credit. Purchasing managers will be requesting extended credit from suppliers, and no longer willing to support higher stocks. Treasury managers will be requesting regular cash forecasts, but not all companies have a treasury team. All of this activity can be monitored and reported through the rolling cash flow.
As the workload increases it is even more important to engage with staff and management to gain respect and future loyalty. As accountants we are often excused of not having the “softer” management skills, now is an opportunity to maintain good staff relations. Employees will appreciate honesty, consistency of message and the sense that the management team are working hard to ensure the companies future. The accountant should be ensuring the quality and consistency of the words and the numbers.
Yet there are opportunities for companies to clear out their balance sheets and to increase provisions without worrying about stakeholder concerns regarding profit margins. There is a question following “Made-off” (in hindsight a guaranteed return should have been the signal that something was wrong – “Made-off” being the future tense for that fund) that consistent performance could not be maintained year after year. The government has shown that bad news is best released when the news is bad, the sensible finance department is revealing the weaknesses in the accounts and building the foundations for a more profitable future. That future will rely upon the cash flow providing the company with adequate funds.
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