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In a once-in-a-lifetime emergency, understanding objectives and updated forecasts can see businesses through the crisis, as Christian Doherty reports. 

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  • Contributed by Christian Doherty
  • May 29, 2020
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In the same way that nonbelievers give up their Sunday mornings and rush to church, and libertarians suddenly become passionate supporters of ‘Big Government’, crises tend to push the anxious into the reassuring arms of those they may have previously scorned.

As the coronavirus outbreak continues to wreak havoc on economies across the world, it’s unsurprising that accountants find themselves once again in the front line of the efforts to protect not just the bottom line, but the very survival of the business. And while every good accountant knows that ultimately some things are beyond their control, there are some smart ways to mitigate the worst of a crisis. 

Keep calm and carry on?

At times like this it is naturally tempting to hunker down and simply cut to the bone and hope for the best.

“I understand that, but from a finance point of view – and this applies to companies that are trying to deal with the crisis – it’s really important that they keep a sense of perspective,” says David Blair, a veteran portfolio FD who works with growing businesses across the UK.

“In practice, that means avoiding the approach that we’re in a whole new world, the sky is falling and therefore we can’t plan. 

“That automatic knee-jerk reaction is absolutely what we mustn’t do,” he says. “But it’s true we have had a change to our business environment, but they happen all the time, albeit over different timescales. And different businesses do sometimes experience overnight change, but the fundamental point is to go back to first principles. And that means understanding what we’re trying to accomplish.” 

For Blair, the most valuable asset that finance can bring is to insist on what he calls ‘integrated financial management’. “That’s important, because budgeting and forecasting are not finance exercises,” he says. “They are strategic exercises that finance takes part in, making sure there is the necessary cash to get you from A to B,” he explains.  

“In a time of crisis, the first thing for the business to do is to understand its objectives and what it wants to achieve in a certain period of time. And then break those down into deliverables and projects, with each project allocated a budget.” 

And while there is a whole business process to get through before the finance team comes into the mix for the budget, it’s up to the finance team to structure its data capture and finance system to map the resources that are being deployed and what they are trying to achieve on those budgets. 

"So by structuring that system with an insight into the business objectives helps not only at the planning stage but much more importantly it gives a clear way to map the transactions and invoices as they come in,” Blair says. “And, provided you’ve got good internal communications, when something comes in you can understand how it relates to the company’s objectives and sticking it into the right part of the right budget.”  

Light at the end of the tunnel

For David Tilston, a veteran former CFO and NED, accountants in businesses facing disruption must prioritise one central tool: forecasting.

“If you’re going to hit a brick wall, you’re not going to see it coming if you’re looking behind you. So you have to look forward for a number of reasons: firstly, how bad can things get?” 

Tilston’s advice is clear: form a forecast and update it every week with new assumptions. “Without that you can’t see what you’re trying to manage. In a simple situation, let’s say you’ve got a gradual decline in your cash balance but it’s a limited amount, you’ll run out [of cash] in two to three months’ time.” 

Offering a finance provider that kind of visibility should help when discussing what type of finance support you think the business will need. And there are three key messages that a good forecast can send. “Firstly, by providing a decent forecast you show you’ve got a set of forecasts that are proven to be reasonably reliable, and while it’s bound to be wrong it’ll be at least right enough to suggest a trajectory. That’s the first message in establishing credibility,” says Triston. 

"The second part says to the bank: 'We can see we’re running into trouble and these are the steps we’re now beginning to take’. The last part is: ‘…but we may still run into problems so here’s the early warning for you, the bank’.” Doing that, Tilston argues, will give the lender both the reassurance you’re on top of the situation, and the time to make a better and more informed decision on how (or if) to help.

Hope for the best

David Fleming, managing director at advisory fi rm Duff  and Phelps, agrees that focusing on accurate forecasting has to be first priority.

“The first thing we’re doing in every case is to look at the 13-week cashflow forecast from the FD and then talk through the assumptions,” he explains.

However, he suggests that finance teams look carefully at their supply chain risk. “A lot of our clients are assuming that the debtor book comes in – it always has done, after all,” he says. 

“But we’re finding that the asset based lending firms are telling us that people are starting to slow down paying their creditors; it’s going all the way down the supply chain, so we’re having serious conversations with FDs that involve them really drilling down into assumptions and you’re looking at a worst case scenario, so we can get a good sense of what the funding requirements might be.” 

Don’t get caught out

For Neil Morling, a veteran finance director with experience of leading businesses across a range of sectors, and now CFO of architectural practice Handley House, there are some rules of thumb for finance to follow in a crisis.

“We need to be true to ourselves: we don’t want to lose money so we will take the costs to where we think they need to be for this period,” he says. “We’ll pare back our costs to what we need today; then it’s a question of whether we have that 5-10% buffer for when the uptick comes. So that means having a secondary plan for when normality returns, whatever that means in practice. How can we then turn the tap on safely once the crisis passes?”

Christian Doherty is a freelance journalist

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