New research has shown that just 14% of UK Finance decision-makers focused on cash flow during the most recent Covid-19 lockdown.
The majority of businesses focussed on cost-cutting exercises and the use of Government support. For example, 41% confirmed they had furloughed accounts payable staff over the past 12 months.
As of June 2021, approximately 11.6 million jobs had been placed on furlough in the United Kingdom as part of the government’s job retention scheme at a cost of around £100 billion.
Ian Smith, GM and Finance Director for document management provider Invu, the company that commissioned the research, argues that cash is the key metric in a crisis.
“Cost-cutting is a key component in cash management but failing to pay attention to current and future cash flow both entering and coming out of a crisis can be terminal for a business.”
“At the start of a crisis, working capital assets and liabilities unwind as the volume of business reduces. For most businesses, this releases cash tied up in working capital and together with cost-cutting may help a business survive to the bottom of the cycle. Emerging from the crisis will see both increasing expenditure and increasing working capital requirements, a nasty pincer movement on cash resources.”
“Surviving this cycle is dependent on having full visibility of working capital commitments which places a high reliance on timely and accurate management accounts and visibility of future financial commitments.”
The survey showed 16% of UK businesses can take up to 20 days to publish their management accounts – a further 7% taking over 30 days.
Smith argues that this is far too long in a normal business environment, let alone a crisis, as the relevance of the information diminishes after each passing day, providing little value for decision making.
“A business needs real-time visibility of variances compared to plan to be agile in a crisis. Each day spent waiting for management accounts, to see variances in performance against the current plan, represents a lag in decision making for corrective actions. This is a significant business vulnerability to nasty financial surprises,” Smith says.
The survey showed that a minority of businesses, 32%, use budgetary controls at the point of making a purchase commitment, and 68% of those businesses believed their purchasing process was effective.
“The majority of businesses appear to make financial commitments without fully understanding their financial business impact at the point of purchase. Combining this with slow management reporting means the impact on cash is often not known until it’s too late to do anything about it,” Smith continues. “Narrowing the gap between making a commitment and understanding its impact on cash flow needs to be a priority. Businesses failing to address this are at risk.”