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Short-term survival or long-term growth: balancing the books

31 July: The post-pandemic cashflow crunch is likely to propel chartered accountants to the forefront of business activities. But what role should finance professionals be playing in balancing short and long-term decisions to weather the current economic storm? Rachel Willcox reports.

For many organisations, the business backlash from the COVID-19 pandemic poses an existential threat that is placing many under extreme pressure. The good news is that chartered accountants with the right skills and capabilities are ideally placed to help them weather the storm.

Following a disappointing bounce-back from April’s historic 20.3% plunge in GDP and despite a raft of government financial support and stimulus packages from government, the challenge facing businesses is balancing the short-term firefighting and urgent need to shore up operations with decisions that will benefit longer-term growth. 

So how should accountants best use their skills and knowledge to guide their businesses over the coming months? And where can finance teams add value to businesses at this difficult time?

Become part of the process

While specifics will of course vary, there is a consensus that finance teams need to be part of the decision-making process rather than just providers of information, warns Rick Payne, technical manager in the Institute’s Business and Management Faculty. 

“That leads to drawing on "professional judgment" to ensure that businesses prioritise and focus effectively; helping the business be clear on what decisions need to be made and when then providing information, insights and recommendations in relation to those decisions,” Payne adds.

It’s about making sure the numbers not only “add up”, but also providing an appropriate challenge of key assumptions and ensuring the related financial consequences are considered and quantified, agrees Laura Leslie, corporate business director at DSG Chartered Accountants.

The unprecedented experiences since lockdown have forced many businesses to implement change at breakneck speed. Given anticipation, forecasting and planning will remain difficult for the foreseeable future, those who can rapidly obtain, synthesise and respond to new information by feeding it into rapid decision-making and implementation processes will be able to compete most effectively. 

But there should be enough flex in your business strategy to allow for rapid adjustment to changed circumstances, rather than basing them on fixed assumptions. “Scenario planning should be used to enable the rapid implementation of alternative strategies and facilitate a rapid response if the worst-case scenario begins to materialise,” Payne explains.

Building flexible models

If there's one thing the COVID crisis has proved, it's that most businesses’ disaster recovery plans weren't worth the paper they were written on, bemoans Alastair Thomson, a portfolio Finance Director working with a range of SMEs and author of Cash Flow Surge. “Many businesses have too much fixed cost, too much debt and too many inflexibilities built into their operating model as they've squeezed the last few fractions of a penny out of unit costs. In good times, that might appear reasonable enough, but when the crisis hit, it left businesses without options,” Thomson says.

As events of the last few months have shown, accountants might have been better advised to build business models optimised for flexibility at a reasonable cost, not business models optimised for the lowest possible cost, but riddled with inflexibilities, Thomson suggests. “As the world becomes a less certain, less controllable, less predictable place, business models that are "light on their toes" are likely to be the best way forward,” he adds.

Cashflow crunch

As businesses start to emerge from lockdown, many will be facing a cashflow crunch that will hit them hard in the New Year, as deferred VAT liabilities and existing corporate and personal tax liabilities arrive at the same time as the grants for Job Retention Scheme come to an end and repayments for additional borrowings taken out under the CBILS scheme become due. 

As the rapidly evolving business landscape propels cash management to the forefront of activities, businesses’ finance teams will be asked to step up. Cash is king, as the saying goes, and many finance teams will likely be forecasting best and worst-case scenarios that could have a genuine impact on the future of their organisations. 

Financial professionals are well-placed to assist because they have a better understanding of a company’s costs and have the skills and capabilities to advise on the viability of growth investments, whether it’s by analysing capital expenditure or using forecasting capabilities to track the viability of strategic assumptions. 

Logical decisions for long-term growth

“The smart finance team will prudently navigate through the short-term rocks, whilst keeping an eye on their ultimate destination and investing wherever possible in the resources and long-term strategies for success,” says Shez Hamill, Director at CaseWare UK. 

At the same time, the CFO has a leadership role to play, inspiring confidence across their team and the business as a whole while simultaneously preparing for the worst. In other words, this is about juggling short-term survival while at the same time identifying and formulating strategies for the future and communicating with key stakeholders – especially owners, shareholders and funders. 

At times of uncertainty, it’s normal for emotions to run high. The ability to provide dispassionate guidance and counsel based on factual data will stand you in good stead, says Hamill. “Often as a society we laud the emotional aspects of entrepreneurs, the risk-takers, the gut instinct, the creators and much of our economy still relies on the confidence factor. In times of trouble, however, the accountant needs to guide a business to sometimes very upsetting but logical decisions that ensure the business navigates through.”