The heightened importance of financial forecasting in the current economic climate

The heightened importance of financial forecasting in the current economic climate

While many company directors are switched on with finances, there are some who don’t have a comprehensive understanding of their economic situation.

What we are seeing in the restructuring and insolvency world is businesses, including ones with potential, burning up because directors failed to do core ‘dashboard’ cashflow forecasting and other management information (MI).These directors urgently need to get a grip on the financials – or run the risk of sinking the ship.

That includes increased focus on 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 worrying, in our experience, how many directors don’t 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 England & Wales 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

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.

We are increasingly having conversations where directors are burying their heads in the sand. 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.

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.

We actively encourage early engagement with a specialist advisor.

We are here to help

If you have any questions in relation to your financial forecasting set up or steps to take to safeguard your business, please get in touch with a member of our specialist team or your usual Azets advisor.