Accounting in a time of crisis – key learnings and how to re-establish control

Major crises can have a significant impact on any business. Here we look at the tools and techniques required by accounting and finance teams to steer their organisations to safety.

Financial control is vital to any business’ functionality. Without it, expenses and incomings can quickly lose balance, and if left unchecked, can prove terminal. These principles are universal in business and apply in times of normality as much as they do in unusual and novel circumstances.

Specific, discrete events are incredibly hard to predict and specifically prepare for, in general, major events that can have an impact on business conditions are, in fact, relatively common – so it is only prudent to have a framework in place to address them. 

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Predicting the future?

Unfortunately, there is an understandable human tendency to weigh up the chances of a given event happening – concluding it is unlikely to occur and thus not worth investing time and resources in preparation for something that probably won’t take place. 

Take the current coronavirus (Covid-19) crisis. There have been many scientists, business leaders and politicians warning that a pandemic would hit at some point, with little material and substantive action taken as a result, especially in sectors beyond those directly involved in outbreak preparedness. 

The result is the situation we see today, with hundreds of thousands of businesses across the UK adversely affected and looking to navigate unprecedented conditions. This is where accountants come in. 

“It’s a bit like an insurance policy,” says Laura Whyte MAAT, director at Truro-based accountancy firm, Whyfield. “You hope you’ll never need contingency plans, but you know you’ve got them there should something happen that’s outside of your control. Cash flow forecasting, planning and contingency planning should really be treated in the same way. I can’t imagine running my business without them.” 

The importance of regular forecasting

Part of the answer here is scenario forecasting. In which finance teams play out potential outcomes of a scenario, and imagine the impact those outcomes will have on their organisations’ finances.

So how is scenario forecasting undertaken? It is typically done by initially discussing how shifts in society, economics, politics and technology will change, and how they might affect a particular issue. Based on this discussion, the team will then draw up a list of priorities and variables that could have the greatest impact on them. It’s these priorities and variables that then form the basis for envisaging the future outcomes. 

The simplest way to do this is to take two variables and play them off against each other, with a “best case” and “worst-case” for each. This will then provide four possible futures to account for:

  • Variable 1 (best case/worst case) 
  • Variable 2 (best case/worst case) 

Greater visibility over potential outcomes

Through doing this, finance teams have visibility over possible potential futures and budget accordingly. 

“Over the last few months, we’ve spent a lot of time with clients, looking at cash flows, the tolerances they have, ways of saving. Although we’ve been forced into this situation, hopefully, the exercises we’ve gone through them is going to make sure they’re set for the future if they experience anything else like this,” Whyte explains.

“There are a lot of businesses out there that haven’t seen the value of doing these exercises previously and they can rest on their laurels a little because things have been okay up until now. We always encourage all our clients to go through that process and provide free resources on our website to do it, so they don’t have to spend a fortune and they can do it themselves.”  

Avoid common issues 

While companies such as Debenhams and Carillion are vastly different in a variety of ways, they all had one thing in common – poor financial controls and a lack of ability to adapt to changing conditions.  

They generally had high operational gearing, over-expansion, unsustainable debt levels, overly-aggressive growth targets, pension plan deficits, poor cash flow and internal control weaknesses, all of which contributed to these companies’ failures. 

Debt, in particular, has been a major milestone for many of the businesses that collapsed in the examples we looked at. They had borrowed too much and were facing high interest payments, which shackled attempts at recovery and in some cases pushed them to the point of default.

Another is low-profit margin – which, in the case of Carillion, stemmed from taking on unfavourable contracts as it prioritised market share over profit, and in the cases of retailers, over-expansion of physical stores.

The use of incremental budgeting

Most businesses use what’s known as incremental budgeting, based on previous years’ actual performance. It’s relatively quick and easy, although it can still take a full quarter to put together. One of the disadvantages of budgeting in this way is that it assumes trading conditions will remain much the same. That, in turn, can lead to complacency. Slack is often rolled over and, as a result, can skew decision-making. 

“Budgets that add just 5% or 10% onto last year’s performance isn’t budgeting, that’s just setting a benchmark,” says Whyte. “When we’re speaking to our clients, we’ll go through two or three different budgets. We’ll go through that baseline, what they should achieve, their ‘dream budget’ and what could happen and usually the budget they go for is somewhere between the two. Taking last year’s budget, rolling it forward and adding a little bit can mean you’re a bit numb to it, a bit blasé and you perhaps don’t reflect on what happened enough.” 

Ali Jaw corroborates Whyte’s analysis. “Obviously, even if you normally build on last year’s performance, it’s not like for like, given the pandemic,” he explains. “These are things you have to keep revisiting – investing in technology and forecasting software, which will help. You produce several different possibilities, worst-case scenario and best-guess scenario and in-between.”

Instead of building the budget on the previous year’s results, Jaw advocates what he describes as “zero-based budgeting” in times of crisis. Zero-based budgeting is done considering the base as zero, without considering the budget of the previous year. For every financial period, a fresh budget is prepared from the scratch and resources allocated to each department are justified according to the expenses of that particular period. 

Become resilient 

The production of budgets for several alternative scenarios automatically builds in additional flexibility and allows the business to adapt to the changing conditions as they occur, rather than stranding it as events overtake it and leaving it in an irrecoverable position later on. 

If conditions worsen, the accounts and finance team have practical measures to call on in order to impose some financial control and keep the company healthy. These could include measures such as freezes on temporary staff and overtime, leaner operational structures, travel freezes and strict expenditure policies, closely monitoring working capital cycles and senior management authorisation on capital expenditure, for example. 

Adjusting and reviewing the budget regularly as conditions change may also form part of the practical response – conducting monthly rolling budgets and paying closer attention to regional and national results. 

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Cash flow forecasts

Another tool in the accountant’s armoury is regular cash flow forecasts. The biggest fear is running out of cash, so many adopt soft capital rationing internally to ensure there’s a buffer, while efforts are made to secure finance sooner rather than later. This is regularly reviewed in order to stay abreast of the organisation’s position. 

For North Brewing Group finance director Jo Wilkinson MAAT, it’s been vital to adapt quickly to the Covid-19 outbreak, despite its damaging impact on North Brewing Group’s revenue streams, in order to plug those gaps. Working as she does for a business in retail and hospitality, Wilkinson has had to adapt the business and finance function to help North Brewing Group trade through the Covid-19 crisis. 

Digital’s role 

Digital tools have been vital to North Brewing Group’s ability to adapt and function during the Covid-19 crisis. Xero and Receipt Bank in particular have allowed Wilkinson and her team to keep abreast of cash flow and enabled detailed forecasting. Using these Cloud tools also means Wilkinson and members of her finance team are able to work remotely during the lockdown. 

“Normally my role is a strategic one, but I’ve taken on more day-to-day cash management while our finance manager is furloughed and our financial assistant does bookkeeping,” she explains. “We already used Receipt Bank and Xero, so we were already prepared for working from the cloud. We also use Microsoft Office, so we have Teams for instant messaging and video conferencing. It wasn’t too much of a transition.”  

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