Covid lets capital advisory out of the bottleby
A year after sending their workforces home, companies around the UK are now dealing with the return to business under very different circumstances. And many of them are going to need to shore up their balance sheets.
Companies have burned through their cash reserves during the past year. Government support loans are a lifeline that has saddled many firms with huge debts - the cost of staying afloat through multiple lockdowns.
Finance teams around the country have a central role to play in the economic recovery, helping to answer questions about how much office, warehouse or shop floor space will be needed, or when the debts are due and where the balance sheet can be propped up.
More than £76bn in government-backed loans was handed out to businesses via emergency schemes since the start of the pandemic, alongside other support made available via banks and other lending facilities.
A crunch is coming, however, and many small businesses are expected to struggle with repayments. UK Finance and the British Business Bank are projecting a default rate of 25-30% on the full range of support loans. Digging more deeply into the Bounce Back loans made to small and medium enterprises, the National Audit Office (NAO) estimates that around 60% of will likely never be repaid, meaning up to £27bn could be lost in defaults.
In spite of optimistic statements from bank CEOs and macroeconomists, the most recent Federation of Small Businesses (FSB) survey found recovery optimism at rock bottom, representing the worst stretch of negative sentiment since the 2008 financial crisis.
“We expect corporate insolvencies could be much higher in the first half of 2021 compared with previous years,” said Dan Butters, head of restructuring services at Deloitte. “They could potentially be even higher than the average 60% increase experienced at the height of the global financial crisis in 2009. Automotive, retail and food service are expected to be the most impacted.”
However, Britain’s successful vaccine rollout has given everyone reasons to be cheerful, and experts believe the scene is set for the country’s financial and professional services sector to prove why it is the best in the world by facilitating a speedy economic recovery.
The advisory gap
Enter the accountants, who will be called on to give actionable advice on revenue streams inside troubled companies. This could be on the sustainability of certain spending, or how key dates concerning repayment of the coronavirus business interruption loans and bounce back loans may factor into future capital requirements. It may be on the availability of recovery loans, launched in April to provide additional support for businesses that need it.
“Amid all this uncertainty, the chief financial officer (CFO) plays a strong, central role, alongside executive peers, in stabilising the business and positioning it to thrive when conditions improve,” said Ankur Agrawal, partner at McKinsey. “The CFO is the leader, after all, who most directly contributes to a company’s financial health and organisational resilience day to day.”
It wasn’t always like this. Yet the twin pincers of Brexit and coronavirus have shifted the role of the accountant away from straightforward compliance and tax to more strategically-focussed operations.
Over the last year, capital advisory has grown in prominence due to the necessity of tapping into pandemic support loans and the paucity of bank managers available to help, and it’s unlikely the genie will go back in the bottle.
The main driver of this evolution in duty is technology. Advisory work has always centred around a deep understanding of the client, but in days gone by decisions were often taken based on past performance or personal relationships.
Today, data is the method. Through machine learning, artificial intelligence and cloud computing, accountants have much greater means to utilise data and interpret it to shape or support management judgements.
Accountants can also lean on technology to tap into a much wider range of capital options than would have been available to businesses previously through banking relationships alone.
The balance sheet is a priority
Refinancing is likely to be the first port of call for many firms through Q2, as matters of whether a default is likely will trump any thinking about future strategy. Having a wider array of borrowing options and the means to understand which is the most suitable will be of central importance to firms still in survival mode heading into Q3 and Q4.
“Cash repatriation may be required to cover current expenses, repay obligations, fund pensions, redeploy funds throughout the group, fund business acquisitions, or repurchase stock,” said Ben Moseley, global finance and treasury partner at Deloitte.
“Various mechanisms can achieve this, including distributions, structural lending, and cash pool overdrafts, depending in part on the legal requirements.”
Strategic planning will be crucial to ensuring the correct path is taken through this period when it comes to the many ways of getting liquidity into the business, he said.
This kind of thinking emphasises how important the accountants have become to delivering efficiency, insight and value to businesses today, said Rachel Woods, director of corporates at KPMG.
“Finance functions must move focus from transaction processing and reporting towards strategic business support,” she said.
The need for capital advisory is not limited to the corporate market. Thanks to the pandemic, businesses of all sizes will be scrambling to navigate the crisis in hugely challenging circumstances. A data-driven finance function - whether in-house or delivered by an outsourced provider - can step up beyond bookkeeping to offer these services and enhance the value it delivers.
Many of the changes triggered by the pandemic, like more video conferencing, less travel and more automated reporting, are here to stay. Add the accountant as advisor to the list; having plotted a path through the pandemic together, no client will want to return to a relationship that only focuses on the past.
According to Capitalise.com founder Paul Surtees, “The silver lining of the pandemic is that you will have built deeper relationships. With technology in hand to facilitate the shift from the 80/20 rule, you can build greater value across your whole portfolio through a holistic approach to all of your clients, not just your best clients.”