FRP: Remember to check the financial forecast
Matt Whitchurch, partner at specialist business advisory firm FRP in Bristol, highlights the importance of using financial forecasting to spot warning signs.
The last four years have been extremely challenging for business owners across all sectors of the economy. The unprecedented conditions that caused the pandemic may have abated, but a cocktail of supply chain pressures, soaring inflation and consistent increase rate hikes then took hold.
There is growing reason for optimism, with the Bank of England taking the decision in July to cut interest rates for the first time since March 2020.
Rates are still high, however, and the number of monthly insolvencies remains elevated. That said, there are always steps that can be taken to support a business in distress.
Proactivity is key
For many business owners, it can be hard to admit when their company is in distress. Especially for those who have spent years building a business from the ground up and are determined to see it thrive. As a result, many only seek help when cracks are visible and problems have become ingrained.
Instead, management teams must remain vigilant for red flags and tackle problems head on, no matter how small they may seem. This is even more important during times of economic uncertainty. It’s crucial that business owners regularly take stock and form an accurate, unblinkered view of their business’ finances and its position in the market. This will allow them to assess what needs to be done to proactively address areas of underperformance and ensure their growth targets are met.
All business plans should factor in regular reviews of budgets, processes and strategy. At least quarterly, if not monthly, management and finance teams should meet to review forecasts against actual results to identify downturns or missed targets and implement solutions to rectify them if needed.
Symptoms of financial distress to watch out for include deteriorating KPIs and poor performance, declining sales and a thinning order book, and difficulty in delivering services or products on time.
Cash is king
Business owners should also be acutely aware of their cash flow. The importance of forward planning cannot be understated and we always advise management teams to formulate a 13-week cash flow forecast, accounting for all incomings and outgoings over a single quarter.
However, the cause of financial pressures cannot always be planned for, such as increasing competition, advances in technology, higher cost of raw materials, fluctuating consumer trends, delays in project starts and unforeseen macro-economic events. This is why it’s important to continually monitor cash flow and evaluate business performance against forecast.
Initially, small downturns in profits or an overhead that is making a dent in cash flow can be spotted by going over financials line by line. If you notice that something is costing you more than the benefit it is bringing to the business, consider alternatives or look at ways to restructure your operations that can reap a better return on investment.
Adapt to survive
If you have reached the point where you can see the challenges facing your business, you will have to adapt to give your business a chance of moving forward. By considering alternative business arrangements, or looking at ways to restructure operations, businesses can start to reap better returns on investment. Old habits die hard, but it’s crucial to embrace new ideas, think creatively and deconstruct business models if there is a chance of returning to financial stability.
Financing success
Access to finance can be a key determining factor in a business’s future, particularly for smaller firms. Struggling companies should consider approaching banks or lenders for financial products and support to help secure investment and drive growth in the business. That said, financial directors should always consider the implications loan repayments may have on day-to-day cash flow, budgets and operations.
Communication is key
It is also worth stressing that throughout any period of change it is important all employees and stakeholders are updated regularly – be that on new business plans, direction or strategy. This keeps a level of personal involvement and engagement in the process, with the entire workforce working towards the same goal.
Such periods of distress can often be difficult to navigate alone, especially while trying to maintain day-to-day business activity. By working alongside specialist business advisers when you notice early signs of difficulty, you will have a greater chance of protecting your business.
It is at this stage that we can provide strategic guidance to help turn things around, whether that’s supporting businesses with budgeting and negotiating creditor payments, streamlining operations, or focusing on areas to add value which will guide your business moving forward.
For more information on how support from a specialist business advisor can benefit your organisation, email matt.whitchurch@frpadvisory.com or speak to a member of the team at 0117 203 3700.
