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How to get your finances in order: A firm foundation

By Peter Spence, Associate Technical Director — MA, Nick Topazio, ACMA CGMA, Associate Technical Director — MA and Dr. Ian Selby, Vice President – Global Management Accounting Research and Development

No matter what business you’re in, you need to get your finances in order. Establish a firm foundation by addressing these issues.

Considering the current business environment, finance teams need to ask themselves: What is the meaning of the phrase ‘get your finances in order’?

In addressing this question, we recognise that different businesses are in very different places across the lockdown economy. Some may have completely suspended operations. Others may still be operating but using online facilities to maintain a 30-40% operating capability. Some may have stayed fully operational by adopting a work from home operating model.

For us, ‘getting your finances in order’ means ensuring that business finances remain viable. If it’s about viability, then every finance team need to take stock of where their business is in terms of:

Establishing a firm foundation

  1. Its financial strength.
  2. The continuing relevance of its existing business model and operating model.

Building for the future

  1. The evolution of associated strategies and plans.
  2. Realising the benefits of human capital and other intangible capitals (such as security of the supply chain).
  3. New market opportunities and risks.

Every finance team can use these considerations to recognise ‘where we are with our finances.’

Within these five considerations are a set of questions that we have created to enable finance teams to see through the immediate fog of the crisis. By asking your team these questions, you can develop a complete understanding of where your finances stand, and where you can go next.

We will start with the first two considerations — those that help establish a firm foundation.

Establishing a firm foundation

 Overall financial strength

  • What is your position in terms of cash, revenue and costs?
  • What help have you had in terms of government assistance packages or support from your bank?
  • Have you taken advantage of VAT deferral policies? If so, what is the amount of your VAT liability and when are you expected to start paying this to HMRC? Are there payment terms which you could take advantage of?
  • Do you have any staff who are furloughed? If so, does your cash flow forecast factor in taking staff off furlough, possibly in batches?
  • Are your bank reconciliations fully up to date?
  • What bank credit facilities do you have available? What are the covenants attached to these? Is your bank prepared to be flexible with covenants?
  • Are maturation dates for credit facilities adequately staggered? You don’t want them all maturing simultaneously.
  • Do you have any business loans to repay? If so, these loans need to be factored into your financial position for the medium-term.
  • What government or other assistance is available to you in terms of cash grants or loans? Do you need professional assistance to access these funds?
  • What treasury and cash management tools can you use to preserve cash and place you in a stronger financial position?
  • Can you move to a monthly or weekly cash flow forecasting process? Doing so may give you more insight and reaction time to prevent a drain on cash. This short-term cash forecast should identify minimum expected levels of income (including government grants) and those expenditures that you cannot defer or do not wish to defer (deferred costs still need to be paid at some point).
  • Are there any months or weeks within the short-term cash forecast that indicate insufficient cash resources? You might need to devise survival plans. Consider deferring further costs, innovating new revenue streams or seeking additional borrowing facilities.

Business model and operating model

Business model

  • Question your understanding of how your current business model generates value for your key stakeholders. The CGMA Business Model Framework can help.
  • Does your current business model satisfy these three key business viability tests?
       1. Are employees acknowledged to be the cornerstone of the organisation?
       2. How can your business model evolve to align with shifts in customer behavior?
       3. How resilient is your supply chain?

Operating model

  • Has your business retained its skills base? Are they still relevant?
  • Are activities, systems, processes and procedures still fit for future operations?
  • Is your organisational structure still fit to deliver strategies effectively and efficiently? Is it responsive? Can it support innovation?
  • Is the organisation structured in a way to empower its employees?
  • What contracts can be renegotiated and what supplies can you terminate?
  • Do you still need the current workspace that your business occupies?
    1. Is it possible that a new way of working will enable you to move to a smaller space in the medium-term?
    2. However, as lockdown eases, public health regulations require a degree of social distancing at work.  As a result, you may only be able to safely and effectively accommodate 30% - 40% of your staff.  This may delay the release of any surplus workspace identified. 
  • Can your actions and policies be achieved with limited damage to your operating model?
  • Are you optimised for ecommerce?

Having established a firm foundation for ‘getting your finances in order,’ we will move on to building for the future in our next article. We will consider how strategies and plans may need to evolve following the identification of necessary changes to your business model and/or operating model. We will raise key questions that help you benefit from your intangible assets and identify new market opportunities and risks.

To learn more about how you can help your business recover, check out the full Business Resilience: Tools for preparing to reopen businesses report.