Guest blog: Understanding the financial position of your business

The end of the financial year combined with the easing of lockdown and the recovery period from the current recession is giving business owners a lot to think about. We’ve asked our friends at accountancy firm Armstrong Watson to share some advice on the best way to understand your business’s financial position and how to use this new knowledge in planning your next steps.

As we start to see life slowly returning to normal, we should now be looking forward whilst recognising the changes that have occurred within our businesses. We’ll look at some of the potential issues which might have arisen within businesses and, if they have, how to deal with them.

Be prepared to make a loss

With the lockdown potentially resulting in reduced turnover, this will have had an impact on profit margins. Many businesses will be looking at making a loss for a period. Use this time to review your fixed costs and identify any areas of the business which might have historically been underperforming. Challenge that activity.

If losses have been made, remember that you can only draw dividends if you have sufficient equitable reserves to do so.

Manage the way in which you return to normal operations

A business needs to be able to generate sufficient cash to keep trading, but it also needs to retain profitability to be able to earn an economic return. Many business owners are extremely passionate about their businesses, especially SMEs, and it can be difficult to evaluate accurately whether profitability is sustainable.

If you have orders but are struggling for cash, then you may be at risk of overtrading. This could be a particular concern for businesses as they start back up again post lockdown and look to re-establish themselves. Conscious of the lost revenue, business owners will be keen to make up for lost time and may look to take on either the same or increased levels of turnover. However, working capital is likely to have been reduced significantly if the business has been in survival mode. Having the resources to manage pre-pandemic levels of trading may be challenging.

Use forecasts to help you manage the next few months

Difficulties managing cash flow do not mean that the business is in financial trouble. Understanding your cash position in the short and medium-term will help you to assess what steps you will need to take to keep your business moving in a managed way. Devising forecasts with different scenarios will help you understand what your options might be, including whether you expect there to be cash pinches as liabilities start to be repaid

Many businesses are likely to need some additional help as they start back up again. Even businesses which have been going for many years will likely need to treat their business as a start-up in the short to medium term. Preparing a longer-term cash flow forecast will help you to understand what additional funding requirements you may need over the coming months, and in what form.

Remember that deferral is not debt forgiveness

Whilst there has been a lot of leeway with regards to payment obligations during the lockdown, any deferred payments will need to be repaid and that date is fast-approaching with deferred VAT liabilities. If you have managed to negotiate a time to pay agreement or a repayment plan, keeping to agreed terms will be vital in maintaining creditor loyalty in case you need more flexibility later on, especially with existing supplier agreements.

If you are looking to agree a repayment plan, make sure that it is affordable and appropriate – do not agree it based on what you think the creditor wants to see – base it on what you can actually afford. This may mean that you have to repay the arrears over a longer period, but it also gives your business the best chance of survival.

In Summary

Being prepared will help to give your business some resilience as it looks to exit the lockdown. With the reduction in turnover, most businesses will see a cash reduction over the next few months, and mentally preparing yourself that you may make a loss for a short period will help you to deal with the position.

However, if your forecasts show that your business is struggling, seeking advice as soon as possible will give your business the best chance of recovering from the pandemic – there will be more options available if you deal with it head on, rather than leaving it until there is a minimal amount of cash left.

Armstrong Watson have extensive experience in helping businesses to overcome these types of challenges, so please feel free to contact our team for a complimentary initial consultation if you need to chat through your situation. Email heather.bamforth@armstrongwatson.co.uk or call 0808 144 5575 to speak to a business recovery expert.

At Optimum Finance, we utilise innovative technology to offer a range of flexible funding solutions, which grow alongside your business. Get an instant quote for the amount of funding you could access by entering your annual turnover into our web app. Products include invoice discounting and factoring that can boost your cashflow and give you access to a dedicated credit control team.

Email or call us to speak to our experienced team of experts and find out how invoice finance could help your business. We pride ourselves on getting things done quickly and providing access to cash within 24 hours of approval. We are passionate about finding solutions and delivering to clients’ needs.