Cashflow visibility “crucial” to avoid business failure in current climate

Cashflow visibility “crucial” to avoid business failure in current climate

Amid economic challenges and a flurry of post-pandemic insolvencies, accurate forecasting is critical

Cashflow visibility “crucial” to avoid business failure in current climate

The troubling economic climate emphasises the need for businesses to have more visibility over short and long term cashflow analysis in order to avoid insolvency, according to Paul Lodder, VP of accounting product strategy at accounting tech platform DEXT Prepare.

“You often hear the saying ‘cash is king’ – well, lots of businesses fail because of a lack of understanding of what their cash outflows may be over the next quarter,” says Lodder.

He argues that a variety of worsening economic conditions – supply chain issues, rising interest rates and potential wage increase costs – mean that cashflow awareness, particularly from a short-term perspective, has never been more important. 

December 2021 saw UK inflation jump to 5.4 percent – its highest level in 30 years. In response, the Bank of England (BoE) raised interest rates from their historic low of 0.1 percent to 0.25 percent, and again to 0.5 percent in February 2022.

As of February 2022, the inflation rate now sits at 6.2 percent and is likely to continue rising. The rate could surpass the eight percent mark by Spring 2022, according to BoE.

The value of visibility and accessibility

For Lodder, this is one of the reasons why the use of automation to create greater visibility over cashflow is “absolutely critical”. Otherwise, businesses risk issues such as late payments to staff and suppliers, he says. 

“By forecasting, you can understand what kind of buffer you’ve got. It’s not necessarily going to alleviate the issue, but it at least gives you time to make the right decisions and potentially explore what options are available.”

He goes on to explain that, because the use case differs drastically depending on the business, flexibility is a key aspect of any forecasting tool.

“Different views will be needed if you want to buy a new property in six months versus day-to-day working capital management.

“It’s about understanding the strategy of the business and building cashflows around that.”

But Lodder also goes on to note that, while visibility is key, it’s bound to be ineffective if it is lacking in simplicity and intuitiveness.

“There are lots of tools out now where, particularly if you’re integrated with some kind of accounting software to help you pull the numbers across, they can be quite complex and overwhelming and actually provide you with too much information.

“Ultimately, some of the best tools are the most simplistic tools.”

Lodder argues that these key areas of visibility and accessibility are where DEXT Prepare stands out. While it doesn’t directly impact the process of creating a cashflow forecast, it helps businesses to record all the necessary financial information, he says.

“Quite simply, this will help you gather and record all of the financial information you need as quickly and efficiently as possible.

“We’ll help you extract all of that information for you as well.”

Once this process is complete, DEXT Prepare then publishes the data via integration with approximately 27 different accounting software products. 

DEXT Precision, the firm’s data checking and insights tool, can also assess the accuracy of the transactions to ensure that it is error-free.

“So we help both sides of the accounting software in terms of getting the information in, but then also checking the information to ensure it’s free from error,” says Lodder.

“This, in turn, opens the door for you to create accurate forecasts.”

“Capacity is a huge issue”

Lodder goes on to pinpoint automation as the key value-add area for DEXT Prepare, arguing that time saving is invaluable for businesses and their advisers in the current climate.

“At the end of the day, you can still do everything manually, but it takes time, it causes stress, you’re rushing, and mistakes can happen,” he says.

“But if you’re automating everything, not only is everything done quicker, but it will create capacity, and that capacity can then be used wherever you want to use it.”

He also argues that this benefit applies to accounts and their clients easily. While some argue that automation will eventually replace the role of the accountant, this will create opportunities for them, he says.

“Technology creates opportunities for accountants to provide more for their clients, to work more closely with their clients, and ultimately to have better conversations with them and help them achieve their personal and business goals more efficiently.

With a fully integrated, end-to-end, cloud-based workflow, you’ve got the opportunity to really focus on those additional added value areas.”

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