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Monitor cashflow now to plan for uncertain future | accountingweb

Monitor cashflow now to plan for uncertain future


Heeding the red flags on the economy by planning and making decisions now is the best way to cope with the uncertainties of tomorrow, says Alex Falcon Huerta.

27th Oct 2022
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Keeping a close eye on cashflow is key not just to succeed but to staying ahead of potential failure. Ultimately it’s about making the right decisions at the time and knowing you did what you needed to do to stay ahead or out of the fire.

The majority of my client meetings are discussions around cashflow. 

One even checks their Stripe account several times a day to see what cash has come in. As accountants, it has been drummed into our heads to ensure we do not report on a cash basis, but on the accruals concept. How many conversations have you had with clients on the difference between profit and loss vs cashflow? It comes up every time.

The logic behind reporting on an invoice basis is fine but the concerns always fall on cash. It’s always about how much is in the bank. We can send management reports and all the lovely KPIs, but clients are naturally focused on cash. Cash is king.

It's this reason why I'll be talking about how tech can solve the late payments epidemic alogside the small business commissioner Liz Barclay at AccountingWEB Live Expo on 30 November - 1 December. 

Up to date

We constantly review aged payables and receivables with our clients to ensure they are fully up to date. If we see receivables that are old, then we try to support them to get the cash in or even to be part of the credit control function.

If we take on a new client and their charge-out rate hasn’t increased for some time, we’ve supported them in template letters to their customers to explain the increase and seen higher margins from just one professional message. 

Most small and medium-sized enterprises (SMEs) will know what margins to add on to make a profit. Usually I find that they exclude administrative costs. When the cash comes in and they pay their labour and materials, there isn’t enough money in the bank for the rest of the costs, tax or dividends. Most don’t consider administrative costs or hidden depreciation costs.

Cash mindset

The danger with the cash mindset is that some will spend what is in the bank. If they are not strict on saving for tax or they simply think the money is “owed” to them then they will take it and leave a low cash balance. 

So it’s down to advisers to ensure guidance is given on saving the percentage for corporation tax and VAT. Then outside of this, saving for personal tax. Most of us still need to explain the director’s loan account and the extra tax bill on top if this isn’t still to be repaid.

The complexity of the accounting adjustments leads to most not really understanding the cashflow or cash needed for the business, so they overspend. They take it out and they end up using tomorrow’s cash to pay for yesterday’s tax bills, which leads to low cash balances and negative balance sheets.

Cashflow concerns check

Here are a few things we do in Soaring Falcon Accountancy monthly to remove some of the concerns that may lead to poor cashflow:

  • Review margins and what is charged to ensure costs are covered 
  • Provide estimated tax bills – corporation tax and personal tax – so it is clear what to put aside 
  • Keep the fixed asset schedule up to date and ensure depreciation is added
  • Add in the payroll journals to ensure all costs are in that wouldn’t ordinarily be accounted for by purchase invoices, such as work in progress, stock, income in advance and so on
  • Send weekly reports on payables and receivables and keep up to date, checking if support is needed to get old debt
  • Have monthly 15-minute touchpoints to cover any issues or concerns or even spot opportunities 
  • Review director’s loan accounts
  • Educate around the director’s loan account, warning against taking too much and illegal dividends.

Preparation for tomorrow

Interest rates reaching almost 6% and banks pulling out of mortgages are signs that it’s time to consider taking action against a predicted recession.

Unfortunately it will have started to have an impact with business owners losing income already. We need to prepare and ensure we really do understand cash and what’s in our businesses.

This doesn’t come at a great time as many are already heavily in debt post-Covid. This time there will be no furlough, no Bounce Back Loans and probably no low-interest-rate funding. The loans are still due to be repaid and some have already stretched this to a 10-year plan.

As accountants, we can’t even advise our clients on tax planning because of the constant changes in the Budget at the moment. Decisions for some had already been made based on the mini-Budget. 

Here are some basic things to consider now:

  • Review suppliers and supply chain – work out who is likely to be affected 
  • Review contractors – if any projects are in danger then the contractors working on the project will be too
  • Review trade debtors closely – work out who is likely to struggle in a recession and not able to pay 
  • Review personal funding and commitments
  • Can large bills be put on payment plans?
  • If dividends are heavily reduced due to low profits, work out if payments on account for personal tax be reviewed
  • Review customers who pay late and maybe offer a discount for early payment
  • Ask for payments upfront for new work 
  • Agree regular payments on project work instead of just at the end
  • Review your own contracts for payment terms 
  • Take deposits
  • Apply for an overdraft while things are good.

Make use of tools

There are many tools available to help us keep track of our cash. For most of us using software there are many add-on partners, but many still find it easier to use Excel. This is the most straightforward way but it’s open to human error.

Here are some cashflow tools:

And here are some funding partners to consider:

Government grants and funding can be researched for support over a critical time when uncertainty still remains.

Education around cash and cash burn are fundamentals to any business owner and to ensure all the accounting jargon is cut out of the conversation. Ultimately, planning and making decisions now and taking control irrespective of what might happen, will help with the uncertainties of tomorrow.

Alex is on the 'Can tech solve the late payment epidemic?' panel at AccountingWEB Live Expo on 30 November and 1 December. She'll be joined by Liz Barclay, Neal Grimble from Sin Nombre Taco, Sinead McHale from Satago and James Hurley from The Times. Don't miss out and secure your place today! 

Replies (5)

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By FirstTab
27th Oct 2022 18:23

I am not clear about the audience of this post. Accountants? Self promotion?

The points made are basic tools that most accountants would know.

I would understand if the audience was small business owners.

Thanks (0)
Alex Falcon Huerta
By Alex Falcon Huerta FCCA
27th Oct 2022 18:53

It’s kept simple intentionally for other accountants to use for small business owners.

Thanks (2)
paddle steamer
31st Oct 2022 10:01

I agree with monitoring cashflow but would mention that I think it should be a staple tool all of the time not just when there are perceived economic threats.

My daily routine is check the banks, jot totals into diary, review which rents have been received, check balance trend. Notwithstanding we currently operate with large bank balances and no debt this is still my first stop management tool.

These days I do not even bother with management accounts but I do look at cash held, rents receivable and received with o/s rents and voids, tax bills o/s, and exceptional spends (large repairs outwith normal budgets) and ensure that within ready cash (funds on instant access outwith call deposits) we carry sufficient to meet such needs.

IMHO accounts prepared using accruals basis are of course useful but their primacy can often lead to the obvious ( running out of cash) not being noticed.

Thanks (2)
Replying to DJKL:
By Hugo Fair
31st Oct 2022 17:19

Yes, yes, yes.

I was always prepared to tighten discretionary spend processes (or even freeze them) ahead of any discernible negative trend in cashflow. Our cash cover ratio was sacrosanct ... to the extent of cutting heads if need be (on the basis that it was better to do so whilst we had control and could afford the cost of doing so).
As soon as you quickly have your costs minimised (and fixed), attention can be given to the twin imperatives ... reducing debtor days and finding 'offers' with which to tempt clients into short-term expenditure (that you can resource over say the next 12 months).

As you say, accruals basis is essential for understanding your ongoing position (in terms of liabilities in particular) ... but should always be subservient to cash (in your sticky hand or promised for tomorrow morning)!

Thanks (1)
Replying to Hugo Fair:
paddle steamer
01st Nov 2022 09:46

We never get any in our sticky hands these days. We have a wonderful old safe that now stores nothing worth talking about, gone are the days when we carried £5k overnight cover and the tenants rolled in and peeled from a wad to pay their rent. Cash is disappearing, I had to send our window cleaner away without payment a month or so back as he turned up for payment and nobody in the house had any.

Thanks (0)