Business directors in UK SMEs need to get an urgent grip on financial forecasting if their companies are to better weather the economic downturn.
The call to action is sounded by Chris Tate, a restructuring and insolvency partner with Azets, the UK Top 10 accountancy firm.
He said: “While many company directors are switched on with finances, there are others who labour under the misapprehension that they are untouchable – and wrongly think there are no legal consequences to their failings.”
“What my profession is seeing are businesses, including ones with potential, burning up because directors failed to do core ‘dashboard’ cashflow forecasting and other management information (MI).”
“Directors urgently need to get an urgent grip on the financials – or run the risk of sinking the ship.”
“That includes raising their game with forecasting, including understanding that profit on the monthly profit-and-loss spreadsheet is not profit until the money is banked, the invoices having been paid by debtors.”
“With cashflow forecasting, the aim is to ensure there is money set aside to meet peak liabilities, such as suppliers’ bills, quarterly VAT demands and rent, in particular months.”
“It is shocking how many directors don’t even know their own company’s actual monthly or weekly costs and the level of cash headroom they have – that is a good starting point with MI.”
Latest insolvency figures show the number of registered company insolvencies in December 2022 was 1,964, a 32% increase on the previous year (1,489 in December 2021) and 76% higher than in December 2019 (pre-pandemic; 1,119).
Of those, there were 183 compulsory liquidations in December 2022, more than three and a half times as many as in December 2021 and 8% higher than in December 2019.
Chris added: “Amid acute pressures, the UK economy is reportedly set to be the second worst performer in 20 of the world’s largest economies over the next two years.”
“These pressures have been caused by the severest energy crisis since the 1970s and other corrosive factors such as 41-year high inflation, the pandemic, increased borrowing costs, labour shortages, supply chain disruption and what is set to be the biggest fall in living standards in six decades.”
“According to data, the UK economy will only regain its pre-pandemic level by the last quarter of 2024, such are the confluence of impacts. Given this perma-crisis backdrop, it is going to be a rough ride for many local businesses in 2023.”
“Therefore, directors cannot afford to take their eye off the ball – they have a duty to their employers, customers, suppliers, and the wider community. It is a responsibility that cannot be taken lightly or nonchalantly shrugged off.”
Chris raised concerns about directors who leave it too late to call in turnaround and restructuring experts.
He said: “I’m increasingly having conversations where directors are burying their heads in the sand. You get this panicked call, you attend the meeting, and you say ‘we need to do X, Y and Z’ – then it goes deathly quiet. Then, almost always, it is followed up by a panicked call three weeks later where the position has deteriorated further.”
“The problem is time is a key element when we are producing a strategy and we need time to implement it, so leaving things to the last minute does not help. It simply narrows the options even more.”
“I also get approached with ideas from directors as to ‘maybe we could do this’ – but often it is not compliant and must therefore be disregarded. Directors need to act appropriately, take advice at the right time, and they need to act on that advice. They are personally liable for certain actions, or a lack of actions – personal guarantees being an example as they are the hook for the debt.”
“But there are less obvious ones, such as wrongful trading and misfeasance and other antecedent transactions which may be open to challenge once a company enters an insolvency process. You also have new measures, including powers by the Insolvency Service to pursue directors of dissolved companies if there is evidence of wrongdoing.”
“There are also personal liability notices, where HMRC can pursue directors personally in respect of non-payment of employers’ national insurance contributions.”
“Directors can be emotional – they do not want to admit their business is failing, it is a sense of pride, and they don’t want to accept when things go wrong. It is great when everything is doing well and hunky dory but when things slide, there is this sense of panic and if they don’t have help the stress of the situation will only worsen. We actively encourage early engagement.”
With economic data increasingly pointing to a protracted downturn, Azets produced a financial defence toolkit to help businesses. Find out more here