THE IMPORTANCE OF KNOWING YOUR NUMBERS (AND ACTING ON THEM!)Alan Price
I read two articles today which, on the face of it, were totally unrelated. On reflection however it occurred to me that, in fact, they were simply different sides of the same coin. The first, which appeared on the “Construction Enquirer” website, outlined the dangers facing contractors in the construction industry, caused by a massive, and rapid expansion in activity. It referred to a “tidal wave of work”, which the industry is likely to have difficulty dealing with because of weak balance sheets, a “huge skills shortage”, and a “lack of investment in capacity”.
The second, which appeared on the Gov.uk web site, reported that the owner of an MOT and car repair garage had been disqualified from acting as a director for seven years. The conduct that had brought about the disqualification included allowing his company to trade while insolvent, incurring liabilities of £106,000 it could not pay (including £89,000 in VAT and PAYE), and the director himself benefiting to the tune of £107,000, effectively at the creditors’ expense. Now it is, of course, quite possible that the director knew exactly what he was doing, and acted deliberately with blatant disregard for the consequences of his actions. But my experience, as a former insolvency practitioner, tells me that it is likely that one of the principal contributing factors to the company’s failure was that he simply did not have sufficient knowledge of, or control over its financial situation.
The reader might not yet have seen the connection between the two, however it is quite clear to me: in the case of the garage, had the owner exercised proper control over the finances of his company, he would have been able to monitor cash flow and profitability, make provision for the payment of its liabilities, and identify that it could not afford to pay him the extravagant salary he appears to have taken. “Proper control” would have entailed having profit and loss and cash flow forecasts drawn up, and measuring the company’s actual performance against those monthly. This would have allowed him to identify any trends or impending problems at an early stage, so that he could have taken remedial action. It would also have told him how much was available to fund his own drawings.
In the case of the construction industry, experience indicates that those businesses that plan ahead, and keep their cash flow under control, are those which survive very rapid growth, and avoid the perils of over-trading. The planning process, apart from the practical issues such as finding sufficient skilled labour to fulfil contracts, should also involve the preparation of robust financial forecasts so that management can monitor progress monthly, remedy any problems or weaknesses, and build on the positive results. Having a sound financial plan and measuring actual performance against it will also indicate when there is likely to be a squeeze on working capital, so that management can an approach the company’s bank for additional overdraft or other funding facilities at the earliest possible stage.
There is an old saying that, if you fail to plan, you plan to fail, and this is as true now as it has ever been. Those businesses that produce budgets and financial forecasts, and frequently check their actual performance against those (and act on the results!), are the ones that are able to grow in a controlled way during a period of rapid expansion – which we are likely to see in the UK over the next few years. They will also avoid the pitfalls of insolvent trading, and the risks of subsequent director disqualification. A company’s accountant may be able to help preparing financial forecasts and recommending a monitoring procedure, or if not, will be able to recommend a consultant who can do this. Whatever the case, how much better is it to be in control, and aware of all the relevant information, rather than being constantly in the dark, and wondering what is going to happen next?
Alan R Price
For further information about financial forecasting and monitoring for your business, contact Alan Price or Brian Wrigley on 01604 214695, or via the Maximum Profit Growth website www.elysium-dev.co.uk/mp-growth.