23/04/2020 The current health crisis may have caused business to come to a halt for some, but for those operating in essential sectors, confinement measures have accelerated production and sales cycles.
In whatever circumstance a business finds itself, it needs to find ways of managing available cash if it wants to be in a commercially viable position post-crisis. Since cash flow forecasts are driven by a corporation’s consolidated balance sheet, it is important to approach any action plan with cash, Covid-19 and accounting in mind.
Cash and accounting
It goes without saying: there is a direct link between stress on organisational cash flow and the Covid-19 crisis. What is less remarked upon, is the importance of accounting to an organisation’s future.
During a period of significant increase in operational activities, a certain degree of incompleteness when it comes to accounting is to be expected and can be subject to ad hoc action plans later on.
This is particularly the case for companies needing to increase their production capacity and accelerate sales cycles: of course, top priority is given to securing supply and delivery chains, and not necessarily to improving accounting quality. Setbacks can arise due to rapid, sometimes disorganised, customer invoicing, or even delayed invoicing. There could also be more irregular client payments than usual, or payments that are poorly monitored. Emergency supplier payments, which are always riskier in terms of fraud, could be even more high-risk in the current context. Additionally, VAT declarations will be made amidst greater uncertainty concerning the data quality of upstream accounting flows.
Consequences for accounting
For companies with under-performing ancillary functions, action taken post-confinement may negatively impact the quality of accounting data, especially if shortcuts are made purely in the name of expediency, or if teams are unmotivated because of the crisis.
Organisations lacking developed digital offerings, which have not been able to rapidly switch to remote working may also be impacted. This may make it impossible to catch up with the delays caused by lockdown and quarantine and will require exceptional action once business picks up again. The same can be expected for companies that were forced to operate their ancillary functions on a part-time basis in order to limit payroll costs.
Keeping control of accounting
A sudden increase in company activity, or a sudden decline, can cause organisations to lose control of accounting data. Even well-equipped organisations, in terms of internal control and accounting techniques, will find it difficult to manage during this time.
In each scenario, accounting remediation plans must be piloted quickly and concretely using appropriate measurement indicators (open items, customers and supplier receivables, unreconciled bank lines, etc.) in order to make up for any delays whilst maintaining a high level of control over accounting data. It is this reliability and control over accounting data that allows, and will continue to allow, any impacts on cash flow to be effectively managed.
Importance of balance sheets
Lavoisier's law says, "Nothing is lost, nothing is created, everything is transformed" - therefore, company treasury and accounting items on corporate balance sheets are inseparable.
Consequently, it is important to keep in mind the cash-accounting duality when monitoring the treasury’s evolution in a more reliable way while simultaneously fighting two battles during this time of crisis:
- Look back: it is necessary to critically analyse all lines on past balance sheets, to ensure that they all have a justification for being maintained.
- Look forwards: consider the cash flow that will be needed to prepare for the future. The accounting departments must carry on as usual so that current operations can be secured. Above all, they must document all accounting movements that cannot be reconciled, so that supporting elements can be used to finalise this work at a later date.
Focus on the basics
A return to basic accounting is the key to winning these two battles for increased efficiency in cash management:
- Scope out all completed bank reconciliation transactions at a more frequent rate than usual
- Justify all unmarked lines on the balance sheet (suspense accounts, customer receivables and supplier debts, as well as the social and fiscal cycle),
- Write or close all lines that no longer correspond to transactions likely to have an impact on the future - in terms of cash (receipt or disbursement to settle balance sheet transactions) - via corrective action.
- Formalise all cash holdings with accounting by positioning all balance sheet transactions into future cash flow forecasts.
Organisations have already recognised the treasury as a strategic player in managing this unprecedented crisis. Chief Accounting Officers – or similar - must, therefore, be considered the person responsible for improving the reliability of the accounting aggregates that feed cash flow forecasts and prepare for the future with secure and justified accounting practices. Only by meeting this condition will any accounting function be in a position to anticipate the uncertain future – whether it be lucrative or not - and be ready to receive cash flow following recovery, no matter how unpredictable its circumstances or timing may be.