This is a critical issue for accountants looking after small companies and for the financial managers in the businesses. This is because of a fundamental change in the way the progress of SME customers is monitored by providers of credit. The way banks, credit insurers and asset-backed financiers assess price lending and credit has changed forever, with many now insisting that small firms supply monthly management accounts. To optimise business performance, SMEs need to be producing robust and timely management accounts.
The ability of businesses to maximise cash and profits depends on being much more pro-active in the way debtors are managed. This was highlighted by the most recent economic survey by CreditPal and The Forum of Private Business.
The survey revealed that 34% of respondents' monthly turnover was tied up in late payments. It also showed that average unsecured lending rates were 11.7% and most late debtors were financed this way. The survey estimated that the annualised cost of late payments was £21m for the businesses used in this survey.
The ability of businesses to maximise cash and profits depends on being much more pro-active in the way debtors are managed
If this monthly figure of 34% of cash tied up in late payments is repeated for each of the next 12 months, then the annualised lost cash would amount to a staggering £187m for respondents. If these businesses are representative, then this has alarming consequences for them and for the UK economy.
For example, if payments had been made on time, money reserves would have increased by 130%, thereby reducing the need for outside finance and saving the cost of additional credit or expensive unsecured borrowing.
Moreover, the statutory annual accounts filed with Companies House reflect trading at the depths of the recession. Therefore, businesses will not want to be judged on these historic financials and will need to provide up-to-date management information to the finance and credit industry - as well as to suppliers and customers - and in turn to request up-to-date financial information from their customers and suppliers.
There are two main reasons why businesses need to regularly produce monthly management accounts and then share this information with a supplier of finance or credit. Firstly, most companies have squeezed costs and maximised efficiencies using existing methods, so there is little more cash to be generated. Secondly, much more capital is required by a business when it expands. This is why, historically, more companies have gone bankrupt coming out of recession than going into it.
Either way, more outside financing and credit will be required - supported by the proper use of timely and robust management information, which enables lenders to properly assess risk. The qualified financial accountant has a pivotal role to play. As well as producing historic figures reflecting past performance, they help SMEs produce management figures and plan their financing strategy.
The financial accountant operates increasingly as a trusted business adviser, working with the businesses to obtain the credit it requires. In helping clients produce management accounts, the professional adviser helps banks, credit insurers and asset backed lenders to easily and simply assess the risk of lending or providing credit to companies.
For more information please visit www.ifa.org.uk
