Director JS Penny Ltd
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Covid-19 and going concern: Help for SME directors

On 19 May 2020 ICAEW and ICAS jointly issued a guide for directors of SME businesses on the steps required to assess the going concern status of a company. This is a useful reminder, as formal going concern assessments may have been a rare occurrence for many smaller businesses.
2nd Jun 2020
Director JS Penny Ltd
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Cash flow projection spreadsheet
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Unfortunately, Covid-19 changed all that. Most businesses will now face numerous uncertainties and concerns around their future. Even those businesses that are able to continue operations may find themselves subject to difficulties, such as staff illness, supply chain problems and bad debts.

So, what should small business directors do to assess whether they are a going concern? First of all, it helps to know what the phrase “going concern” means in this context.

Going concern defined

Essentially a business is regarded as a going concern unless it intends to liquidate or cease trading or has no realistic alternative but to do so. The period over which such an assessment is made must be at least 12 months from when a set of accounts are approved and must include all available information.

To make any reasonable assessment it will be necessary to prepare a cashflow forecast. Fortunately, and apps like Fluidly and Float can automate it for you based on data from an online accounting system.

Here are some pointers for directors who want to build a cashflow forecast themselves:

Step 1: List income and expenses

Produce a list of all the income and expense items. Use your bank statements or accounting software to remind you of these. Typical items might include the following, but adapt the list to your own business:

  • trading revenue
  • payments to suppliers
  • staff costs
  • utilities
  • rent and rates
  • taxes; and
  • loan repayments.

Step 2: Estimate your cash flows

Now is the tricky bit – you need to estimate the cashflows from the core ingredients on a month by month basis. Make sure you enter things into your spreadsheet (or manual cashflow forecast) based on when you expect cash to arrive or leave your bank account, not when you bill or are billed.

Things to consider when estimating your cash flows

Income - Your income might be very different in the current environment and you will have to make some assumptions in your forecasts. These might include when your business will be able to open or operate normally again. There is a risk that some customers will pay you late, or not at all, so make your best estimate based on the latest information from your receipts.

Note down the assumptions you have made, so that as new information comes to light it is easy to see what might need to be altered. For instance, you might prepare your forecasts based on a return to more normal activity levels in October perhaps, but this will vary from business to business and depend on the pandemic’s progress. If you have an accountant or auditor, they will want to understand your assumptions to see if they are reasonable.

Fixed costs - Some cash flows will be fixed in nature, at least in the short term. These may include premises costs and some staff costs as well as lease payments and loans. Where you know you have specific obligations and you know when they are due, put these into the relevant months in your cashflow.

Even some normally fixed costs might have changed, for example because you have been given a rent holiday or a rates rebate. If you have borrowed money already, perhaps through the government’s schemes, make sure you put in when payments are due, including both interest and capital repayments .

Variable costs - If you are selling less than usual, your costs will usually go down too, but only the variable element. Also be aware that the cost of products or services is not necessarily the same as before the pandemic. Petrol is cheaper for example, but some items are much more expensive.

Staff costs - Include the costs of staff in your cashflow and then separately include any income from schemes such as the Coronavirus Job Retention Scheme (CJRS or furlough). It is important to keep them separate as the costs will probably leave your bank account at a different point to when you receive the government support. You will also need to make sure that you adjust the amounts for changes in the scheme over the coming months.

Step 3: Identify cash shortfalls

Once you have put all the cashflows into your forecast, including your opening bank balance and how it will change over the months, you should be able to see if you have enough cash to survive. If there are pinch points, or serious shortfalls in cash, you will need to consider what mitigating actions you can take. If you already have loans these may have covenants in place which could be breached, which might cause their terms to change. If so, you may need to talk to the bank about what action can be taken.

Step 4: SWOT analysis

An analysis of your business’s strengths, weaknesses, opportunities, and threats (SWOT) may help to identify what you can do to adapt to the changing circumstances.

Conclusion

A cashflow forecast will help to establish whether your business is a going concern for accounting purposes, but perhaps more importantly it will help you identify cash shortfalls so that you consider what steps to take. Together with your SWOT analysis it will help you to identify the best course of action.

ICAEW coronavirus hub

ICAS coronavirus hub

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