Cashflow statements are crucial

In June of this year the Bank of England published commentary on how the Covid 19 shock is likely to effect the cash flows of UK companies. It concluded with an estimate that UK businesses could face a total cash flow deficit of £140 billion!

The reasons for that will no doubt be self-evident – lockdown means footfall numbers have been decimated, the number of high profile companies going into some form of insolvency is on the increase, and fundamentally people are tightening their purse strings and not spending as much as a result. But what continues to surprise me in practice, is the number of businesses that do not have robust cash flow statements.

Understanding the cash coming into a business and the cash going out of a business, as you know, is critical. Although the concept is a simple one and will undoubtedly be front and centre of much of your advice to clients, cash flow statements and projections are crucial in spotting future problems.

Without cash flow statements and projections, it is impossible to see an event of Insolvency before it actually happens. This is important in two ways:

• The first is that cash flow projections are key to see whether the business is worth rescuing, put simply. They are also crucial in obtaining alternate finance, whether through re-banking, re-negotiation of existing terms, or new financing facilities.
• The other, is where things have gone wrong and an insolvency becomes unavoidable. With the benefit of hindsight a liquidator finds that the Directors continued to trade a business after an insolvent liquidation was unavoidable, the Directors carry personal liabilities for the company’s debts.

Given the current global uncertainties we all face, trying to second guess cash flow over the next few quarters is likely going to necessitate some big assumptions. But, fundamentally, it is a Director’s duty to make sure that they conduct their business knowing what that future cash flow could look like.

This is something you should actively be offering your clients.  As Directors, if you do not have cash flow statements to hand, get them!

If you would like further information on the topic discussed in this article, please contact Steven Jansch by email: sjansch@gilsongray.co.uk or by phone: 0131 516 5361 / 07841 920 100. You can also view Steven’s profile by clicking here.

The information and opinions contained in this blog are for information only. They are not intended to constitute advice and should not be relied upon or considered as a replacement for advice. Before acting on any of the information contained in this blog, please seek specific advice from Gilson Gray.