Supporting clients to improve cashflow

According to the government’s most recent insolvency statistics, there were 2,552 insolvencies in May 2023, 40% higher than the same period last year, and higher than pre-pandemic numbers. While some argue that support measures for Covid-19 artificially suppressed last year’s insolvency stats, nonetheless, this year’s statistics show an increasingly alarming trend of business failures. In significant part, cashflow management seems to be a contributing factor to a substantial number of these insolvencies, with businesses struggling to survive delays in receiving payments while operating in a hostile economic environment. Reduced business reserves; high inflation; supply chain challenges; a UK-wide recession; the conflict in Ukraine; record high energy prices; and interest rates on borrowing are all taking their toll, demonstrating more than ever the value in positive cashflow management. A concerning trend The XSBI report by Xero found that 9 out of 10 SME businesses have growth that is directly limited by cashflow concerns, and that the average UK business faces cash flow crunches for at least four months a year. Furthermore, 23% experience cash flow crunches at least six months of the year, and 94% have at least one month of being cashflow negative. Similarly, analysis by Experian earlier this year considered the impact of rising energy prices. Their analysis of 1.16million SME businesses found that 30% are at ‘heightened risk’, meaning that they may not have cash available to absorb more energy price increases. This is more than double the 13% at ‘heightened risk’ before the energy price cap was lifted. Confidence has also worryingly dipped. In Q3 of 2022, the Federation of Small Business’s Index highlighted a fall in SME confidence levels - a trend that has continued in each quarterly index since. Interestingly, the 2022 Q3 index highlighted late payment woes as a key concern, with a rise in businesses seeking finance specifically to cover cashflow concerns. Meanwhile, according to a report from Google, at the end of 2022, searches for “cash flow problems solutions” was up 136% and “cash flow issues” was up 80%. Becoming the expert partner When it comes to positive cashflow management, it is here that accountants can excel as expert advisers to clients. Many SMEs fail to recognise the distinction between cashflow and profit & loss until they’re faced with direct cashflow challenges which force owners in to make rash decisions, and potentially even driving enforced closure. Initially, accountants play a vital role in helping clients to understand the role of cashflow and visualise their own forecast, potentially enhancing the assessment with additional insights such as cashflow stress tests for example. Importantly, highlighting potential bottlenecks in income versus expenditure can support clients to make informed decisions, and make positive changes to reduce or eliminate crunches. Extended finance, more rigorous debtor processes, and even managing payment terms can put clients in better control. If your cashflow forecast identifies potential deficits or surpluses you can advise on the courses of action the business owner or management might consider. What advice you give will depend on whether the projected deficit or surplus is short or long term: Short term Long term Cash deficit Review budgets and planning assumptions Increase payables (take longer credit periods from suppliers) Reduce receivables (chase debtors and offer shorter credit periods to customers) Delay planned large purchases (e.g., upgrading non-current assets) Negotiate overdraft Review business plan and strategy (can the business remain a going concern?) If business deemed unviable, consider shutdown If business deemed viable, raise long-term finance Identify underperforming products or services and consider divestment Cash surplus Pay suppliers early to take advantage of available early settlement discounts Increase inventories to take advantage of bulk purchase discounts Bring forward planned large purchases Make short-term investments Explore options for expansion or diversification Replace or upgrade non-current assets Make long-term investments For accountants, the current economic climate offers a lucrative opportunity to be a critical friend, providing tailored, relevant, and potentially business-saving advice. In part, it relies on the value of digitised, real-time data, with many accountants only delivering a ‘helicopter view’ of year-end finances in accordance with regulatory requirements. Becoming an asset to your clients with proactive advice and management can offer significant pipeline improvements for your own business. Ultimately, while the initial value of cashflow forecasting comes through education and insight for clients, the true value – and indeed the pipeline value for accountants – comes from the personalised support plans that can be offered. Supporting clients with better budgeting, management of credit terms (supply and sale), when to upgrade assets, and how to negotiate suitable finance, can all have a tangible, relevant impact on businesses.