The Pandemic’s Larger Impacts on Financial Reporting It’s About Much More than a Loss of Revenue
Many people incorrectly assumed that the pandemic’s only true effect on a business’s financials was a loss (albeit often significant) of revenue. And while that assumption is not even necessarily true of every business (many did very well), Covid-19 impacted much more—not just financial performance, but also position, cashflow, and balance sheet accounts. There have been impairments to goodwill and other intangibles, effects on inventory, a change in how and when audits are conducted, and impacts to overall company strategy and goals. And these impacts are especially challenging for a company in the growth phase.
If your company is in the growth phase, it’s crucial to think about your options, understand your needs and, more significantly, how they have changed since the pandemic, what numbers are required, and to develop a new strategy. Companies in the growth phase are experiencing positive cash flow. With this increase in cash, they have the ability to repay debt, and are in a better position to seek additional capital from investors to expand their market reach. However, if the CFO hasn’t been carefully monitoring the pandemic’s impact on all aspects of the company’s financials, they likely don’t have their reporting in order to even approach potential investors.
Changing Financial Needs Means Increased Financial Monitoring
We learned fairly quickly in the beginning of the pandemic that liquidity is key to keeping a business from closing its doors in a crisis. The question that plagued many was how to increase liquidity with revenue decreasing? But those CFOs were often only considering pre-pandemic needs and observations, not the changing needs of the company in the midst of the pandemic. Auditors have noted that many accounts, including sales, inventory, and bad debt have been affected, as well as production and distribution.
First, these changing needs require a change in financial monitoring. Cash flow projections and other assumptions used to measure financial instruments pre-pandemic should be adjusted to reflect your company’s new reality. Remember that a majority of businesses have been affected in one way or another, but if that results in their lack of ability to pay you, you’re going to incur additional credit and liquidity risks, increased bad debt, and write-offs.
Cash Flow A careful analysis of your company’s cash flow can help. Some questions to consider about revenue include:
Are accounts receivable being paid?
Are past due accounts being followed up on?
Are late payment fees and interest being charged to customers (your money should not be free)?
Do you need to offer pre-payment discounts?
Should you look at retainers/deposits?
Do you have the capability of setting up auto-payments?
Of course, we can’t consider cash flow without considering expenses. And while there will be a decrease in some, there will be an increase in others. At a minimum, consider the following questions:
How have your office needs changed?
Do you have the ability to downsize?
How much are you saving due to decreased meal and travel expenses?
Where are these savings being utilized?
How much more are you spending on technology expenditures to maintain communications with staff and customers/clients?
Balance Sheet Accounts
Additionally, other balance sheet accounts have also been affected. One issue that warrants attention if you plan to seek outside funding is inventory needs and accessibility. With productivity and supply chains being disrupted, it may be difficult to allocate costs to inventory. There is also the issue of inventory that cannot be delivered because of travel restrictions. This also plays a significant role in the larger economic impact of decreased supply and increased demand, resulting in higher prices going forward.
Goodwill, post-retirement plans, and internal controls are other accounts/issues that require an in depth look at your financials and a pivot in business strategy, as we slowly climb out of this pandemic.
If you’re still waiting for things to get back to “normal,” and analyzing your financials based on pre-pandemic assumptions, you are not doing your business justice. You may think you have enough cash on hand or that expenses are timely being paid, but without meticulous monitoring and a true long-term plan based on our new reality, you cannot forecast or grow to the next level.
This can be overwhelming. But pivoting in your financial planning and forecasting is necessary. Barker Associates has extensive experience in financial statement analysis, plans, and forecasts. If you need assistance, or have any other questions, please click here to schedule a 30-minute consultation at a rate of $100.
Instant rice and online banking have a lot in common. Instant rice is obviously quick, providing you with an immediate result. It works really well for casserole recipes or for certain dishes where rice and other ingredients are mixed together. But if you are serving dinner guests or in a fine restaurant, you expect the chef to put in the extra effort to serve gourmet rice prepared in an exotic way.
Don’t just rely on point-in-time views. Take time to reconcile accounts.
As with instant rice, online banking provides instant information regarding your bank balance, making it a great tool for certain situations; however, if you want to use it as an effective tool to manage your daily cash flow, it requires the extra effort of being connected to a cash reconciliation process that is properly maintained and reviewed periodically.
Before the days of online banking, the standard practice for both personal and business checking accounts was to reconcile a check register to a monthly bank statement. When accounting professionals adopted online banking into their processes, organizations tended to forgo the discipline of maintaining a check register as part of their reconciliation processes.
The following is a typical conversation I’ve had when consulting with clients on accounting process improvements:
Accounting professional, with a bundle of unsigned checks, “This is our process for obtaining check signatures.”
Me, “How do you know you have enough money in the account to cover these checks? What is your procedure?”
Accounting professional, “I checked the balance on line this morning.”
Me, “Where is the reconciliation to the check register? How do you know that all of the uncashed checks will not deplete the entire balance?”
Accounting professional, “I know there are not that many outstanding checks.”
Me, “When is the last time you reconciled the account?”
Accounting professional – answers range from a year ago to do not remember (not good) – to yesterday or a month ago (which is good).
As with using instant rice, there are times when viewing online balances without going through the reconciliation process are appropriate, but it’s not the final reconciliation tool.
Let’s try an experiment: If you are a CEO or President of an entrepreneurial company or a Finance Chair of a non-profit, ask the accounting department for the latest bank/cash reconciliation of the operating account. Ask specifically for these documents:
The bank reconciliation
A copy of the bank document to which it was reconciled
The Balance Sheet balance to which it was reconciled
(Note: Publicly traded companies, financial institutions, insurance companies and other regulated industries have to maintain reconciliation procedures, so if you are in charge of one of those, regulation will take care of this.)
If you are bold enough to move forward with this call to action, my experience tells me about 50% of you will get a reconciliation completed in the last 45 days. If you get one and do not know how to review it, contact me for a free, no-obligation checklist that will guide you through a high-level review. If you do not get a reconciliation, and, in fact, get a blank stare from your accounting person, contact a financial professional to complete a review of your cash procedures and process. You may have plenty of cash flow today – however, that can change quickly if you do not appropriately manage it. Don’t risk finding yourself in a position where you cannot meet your basic financial obligations. “Cash is king” is a cliché’ for a reason – it is a requirement to run almost any type of business.
Mindy Barker & Associates works with entrepreneurial business owners to empower them with the tools and financial information to improve company value, profitability, and cash flow. To find out more on how you can be empowered, contact them today at [email protected], or call 904.728.2920.
Cars built in the early 2000s that had a built-n GPS required periodic updates using a CD with new roads and street addresses. If you are still driving around with a GPS of that era, you already know that when you get to a new construction area, the GPS will confuse you more than help you get to your destination. This analogy is similar to preparing an annual income statement for a budget without updated information. The annual income statement will show the projected revenue and expenses – but will leave out critical pieces of information vital to the day-to-day planning of a business. Here’s an example of what I mean: revenue is highly seasonal but expenses are spread throughout the year, causing issues with covering expenses month to month. Actual cash flow and the ability to cover debt service payments are not analyzed solely with an income statement. Another example: internally developed software can cost a lot of money; the cash required for the development is maintained on the Balance Sheet and not the Income Statement.
Lack of proper planning and analysis, and failure to prepare a projected-by-month Income Statement, Balance Sheet and Cash Flow can lead to an unplanned cash crisis. Please contact Mindy Barker & Associates if you would like to have your budget process reviewed to determine how you can avoid such crises each month.