Business Finance Nightmares and how to prevent them

Spooky season is upon us, and few things are as chilling as a financial nightmare threatening your business.

As we build up to fright night, the Shorts team has been discussing “nightmare” situations that businesses may find themselves in should things go wrong.

Here, our Genus Management Accounts team looks at some common business finance nightmares with tips on preventing them.

Cashflow catastrophe

Cash flow is the lifeblood of a business, adding planning and forethought to finances, signalling potential cash shortages, and enabling businesses to keep on top of any debts they have.

Improper cash flow reporting can have severe consequences for a business, including:

• misleading investors and shareholders
• creating cash shortages
• missing growth opportunities
• increased borrowing costs
• legal and regulatory problems
• internal dysfunction

Unexpected cash shortages can affect critical expenses, like payroll obligations, bills, and debts, potentially jeopardising the business.

How to prevent a cashflow catastrophe

Preventing a cash flow nightmare starts with an accurate cash flow forecast (which includes a sales forecast and expenditure forecast). This should focus on how cash moves around during the various stages of your product or service lifecycle, signalling any potential pitfalls or tricky periods in advance.

This security can be solidified with robust financial controls, using reliable accounting practices, and regularly reviewing and analysing cash flow statements to ensure they accurately reflect the company's financial position.

Credit control crisis

Reliable credit control is vital for businesses, as it helps ensure financial stability, minimises risks and helps maintain healthy cash flow.

With poor credit control, things can go very wrong very quickly. Perhaps you are paying suppliers faster than you get income from customers, or the cost of bad debt is stacking up?

Poor credit control can have a domino effect on business finances, with implications such as:

• impacts on immediate cash flow
• compromised business stability
• damage to relationships with customers and suppliers
• triggering of legal or regulatory issues
• damage to the credit rating of your business.

Stay on top of your credit control

Introducing effective credit control practices is an essential part of building a robust finance function, maintaining financial health, and enabling the long-term success of a business.

We also recommend establishing clear credit policies and procedures (and sticking to them), conducting thorough credit checks on new customers, setting unambiguous payment terms, regularly monitoring your accounts, and maintaining open and proactive customer communications.

Management Information (MI) mishaps

Management Information (MI) is collated data, reports and information that are processed and presented clearly to support decision-making. It includes financial and non-financial data and is essential for navigating finance.

If your MI is not up to scratch, you run the risk of several significant issues, including:

• making poor decisions and flawed business strategies
• financial losses
• inefficient allocation of resources
• increased financial risk
• operational issues and inefficiencies
• regulatory/legal issues
• loss of competitive advantage
• reputational damage
• loss of stakeholder/shareholder confidence

Making management information work better

Management Information is one of the most valuable tools available to businesses, and you can help avoid mishaps by ensuring it is as accurate and relevant as possible.

You can do this by identifying clear information needs and collecting high-quality data systematically and consistently while centralising your data repository to have a single source of truth. This data should then be checked regularly to ensure accuracy.

In addition, you can use various business intelligence tools to track Key Performance Indicators and employ data analytics techniques to gain maximum insight from the information available.

Delayed MI disasters!

Management information (MI) is intrinsically linked to year-end accounts. Management reports form the foundation for preparing year-end accounts, so it might be easy to assume Management Accounts are only needed annually. But this is not the case.

If you wait until the year-end to see how your business is performing, you may discover critical issues several months after they have begun (and it may then be too late to fix them before they cause real damage).

Furthermore, you may miss significant growth and efficiency opportunities by not regularly updating and examining your MI. The business world moves fast, and your MI should do the same to help you avoid a delayed MI disaster.

How often should you examine your MI?

We recommend preparing management accounts to properly examine your MI regularly – this should be quarterly or monthly if you have the means to produce them.

Regular management accounts enable senior management to make better decisions and respond quickly to emergent opportunities and risks.

Poor process panic!

A well-engineered business should have various processes and controls to ensure everything runs smoothly.

These processes can cover all areas of operations and finance and might include access controls, documented policies, data encryption, automated reconciliation, or segregation of duties (SoD). Without such processes and controls in place, panic can ensue, with issues such as:

• financial losses
• fraud and embezzlement
• compliance violations
• supply chain disruptions
• legal consequences
• reputational damage
• data breaches and cyber attacks

How to strengthen your processes and controls

Introducing tough processes and controls in a business is essential for enhancing efficiency, reducing risks, and ensuring legal and financial compliance. There is no one-size-fits-all solution to the development of processes and controls, but here are some tips to get you started:

• Identify areas of weakness in your current processes
• Set clear objectives
• Document all existing processes
• Prioritise areas most in need of improvement (highest risk)
• Engage your stakeholders
• Leverage technology available
• Train employees
• Test and monitor
• Keep up-to-date records and review these regularly

Keep your business finances solid this year (and every year) While this article has been a more light-hearted take on business finance challenges, we hope that it has helped highlight critical areas to get right to avoid a variety of financial issues. If you are experiencing one of these business finance nightmares (or fear you may be in the future), the Genus Management Accounts team at Shorts can offer professional, qualified advice to help you keep the ship righted and your business finances healthy.