Time to review key performance indicators?

Company reports generic
By Setutsi van Lare, ICAS Insolvency Technical Support

9 August 2016

Setutsi van Lare says directors and business owners can take some key steps to ensure their enterprise remains on a sound footing in uncertain times.

As companies post half year results, the messages coming out are mixed – gains here, losses there, which indicate there is much uncertainty in the marketplace.

Sectors depending upon imports are seeing costs rise as the value of the pound falls, whereas businesses that rely on the export market are finding that their goods are more affordable.

How long this period of uncertainty will continue is anyone’s guess. Savings have been hit hard for several years and spending is at its lowest level yet. There is no guarantee that the Bank of England’s reduction in interest rates to an all-time low of 0.25%, or the £445Bn corporate bond and asset purchase programme will have the desired effect of stimulating the UK economy.  

In this current economic climate, directors and business owners may wish to take a closer look at the financial status of their businesses to see whether they are on a sound footing to weather the ‘storm’. There are steps they may wish to consider to mitigate difficulties which could ultimately lead to the loss of the business and the associated impact such as loss of employee jobs, the knock-on effect on suppliers and other creditors that come with business failure.

The main causes of business failure have been shown to be:

  • Loss of market – this may be due to a number of factors such as, costs, competition, failure to know your customer.
  • Management failure – this may be a result of not keeping an eye on the performance of the business or leaving it too late to take appropriate action.
  • Bad debts – a failure to pursue outstanding debts early or allowing creditors more and more time to pay when you should be questioning whether they are experiencing financial difficulties.
  • Lack of working capital – insufficient cash flow and not engaging with lenders will have a negative effect on the financial position of a business

There are a few strategic actions which will help keep owner/directors up to date with the business’ financial status and provide alerts to any potential difficulties which may lie ahead. These include

  1. Being aware of the financial circumstances of the business. Have a business plan in place and review performance against the plan on a regular basis.
  2. Knowing the problems the business may be facing. Prepare annual projections and importantly, cash flow forecasts. Prepare regular management accounts and assess actual versus budget to identify any variances that may require corrective action to be taken.
  3. Have in place a plan to deal with any problems. Review costs, supplier terms and debtor profiles regularly. Consider what can be changed or improved to provide a better outcome for the business. Hold regular meetings with management teams and other key personnel.
  4. Look at ways of improving your offering/product. Be aware of what competitors are doing or how the market is changing over time.

If you feel it would be helpful to seek advice, speak to a Chartered Accountant (CA) or a Licenced Insolvency Practitioner (IP). Most IPs offer an initial consultation free of charge. It is always best to seek help or at least to check that you are taking the correct steps to keeping your business viable sooner rather than later.

You can find details of CAs and licenced insolvency practitioners on the ICAS website.

Topics

  • Corporate and financial reporting
  • Insolvency
  • Business

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