By Dennis Ssebugwawo
Many business entities were greatly and continue to be affected by the tough effects of Covid-19 pandemic.
Sectors such as education, entertainment, and transport among others were highly affected – these continue to struggle as of date. The inability to pay staff, suppliers, bills and meet other business related short or long term financial obligations as and when they fall due, termination of employment and other services contracts, closure of some branches or business locations are a clear sign that many of such entities are facing financial distress or cash flow problems which threaten their going concern.
Going concern is an assumption that an entity shall continue in operation for a foreseeable future – usually 12months. It indicates that the owners have no intention to liquidate or curtail major operations. This accounting concept shall be covered in details in subsequent articles.
All these result from declining revenue from the services rendered due to low demand, increased debtor’s repayment period or poor credit control procedures, poor debt management, fraud or impropriety on the side of the management, unfavorable changes in government policies, inadequate accounting practices among others, most of these result from Covid-19-related effects. In such situations cash flow management is very crucial as this will determine the existence of the business.
The purpose of this article is to highlight some key practical actions which managements of different entities in Uganda and beyond should consider to initiate and maintain to ensure that the short and long-term obligations are met as and when they fall due. These steps will ensure that the going concern of the business is not in doubt.
Ensuring good credit control systems.
Since longer repayments period from the credit customers greatly affect the cash flows, businesses are advised to implement some credit control procedures such as deciding with clients on the favorable payment terms and ensure that these terms are communicated to the customers and adhered to by them. It should also be a practice where overdue invoices are charged interest in order to discourage long payment periods. This will ensure that more cash comes in that will allow such entities to meet financial obligations as and when they fall due, especially suppliers credits and key staff.
Analysis of the revenue.
Revenue forecasts must be produced to ensure that these are met in order to be sure of sufficient cash over the coming periods. These forecasts should however be realistic i.e. being closer to the reality.
The finance or revenue department should have sufficient data on the probable number of clients that are likely to be registered and assess the related revenue for a given period. This will give room to the entities to identify possible revenues upon which budgets will be grounded.
Restructuring of credits terms
Since many of such entities cannot meet the obligations or meet them with difficulties, it can consider renegotiating the credit terms with some key suppliers and other service providers and adjust their repayment terms such as granting more time to pay, abandoning of interest on overdue debts if any among others. This will improve the liquidity of these businesses, which will in turn make them continue in operation.
Strong Inventory Control Measures.
It is very easy for entities during such times to run into problems when cash is tied up into inventory or stock of goods and other office equipments which cannot be consumed fast enough or generate the anticipated revenue. Therefore, it will be crucial to implement a system to manage stock levels for these supplies through ensuring that it is acquired at the right time and at the right place while avoiding cash being tied up in stock and idle equipments unnecessarily. This will also solve the issue of expired or slow moving stock.
Some outlays such as capital expenditure for property plant and equipments need to be suspended during this period as these may consume huge sums of cash available for short term obligations. In any event these items are urgently needed, entities may consider acquiring through a finance lease arrangement or any other suitable arrangements that prevents cash outflows during this period.
Reduction of unnecessary costs.
Since cash flow problems result from increased expenditure which drain the working capital of the entity, businesses can consider cutting costs such as staff or even cutting back on the management incentives which are often costly to the entity’s bottom line. It is advisable to consider cutting off such costs and instead maintain the advertisement budget as this may lead to the growth in revenue.
However, entities need to be mindful while making cuts towards staff costs especially when it comes to essential workers upon which some businesses survives.
Preparation and review of financial reports.
The key part of effectively managing cash flows is having a proper understanding of the financial information. Business sales and expenses should be well analyzed and assess the departments that are underperforming or where costs have drastically increased. The reports that provide such financial data that the entities must prepare and review include, the cash flow statements that show the movements of cash and cash equivalents, the Statement of profit or loss, statement of financial position, sales forecasts, ratio analysis among others. All these will depict a clear picture on the financial health of businesses for the purposes of financial planning.
Noticing the Warning signs.
Entities should be in position to spot and be mindful of any signs in the financial reports that can indicate potential future cash flow issues, such as change in government policies towards the general operational procedures i.e. Introduction of new standard regulations against the spread of Covid-19 all of which threaten the cash flows, changes in currency exchange rates among others. These should be spotted immediately so that immediate action against them are taken.
Being honest and realistic.
In case an entity is faced with regular cash flow problems such as very low sales and high costs, it should honestly assess the position to devise honest plans to address the issue. These plans may include raising more share capital, considering a joint venture, applying for financial assistance in form of a government grant or loans, among others.
It can be clearly noted that and general conclusion drawn that; cash flow problem or financial distress has a negative effect on overall value of any business and these costs become considerable with higher levels of gearing, and even if the managing of cash flows prevents a liquidation, relationships with key suppliers, Clients and employees may extremely be impaired. It is therefore very important for businesses to implement all the above procedures to ensure that the financial position is restored and that the going concern is not in doubt.
The Writer is Accountant at Citadel Advocates and a Private Tutor.