In the last week we’ve seen a quite shocking financial news story break in the mainstream UK media, concerning the cashflow position of Patisserie Valerie. Everyone thought this was a successful, stable business which was worth £440M and growing and had cash reserves of over £28M.
It now seems that, under the surface, the business was being undermined by fraudulent activity and many financial decisions had been taken without the knowledge of board members.
Before they knew what had happened, the directors were faced with a winding-up order from HMRC for part of the business, the need to find emergency operating capital and deal with the reputational damage of all this becoming public knowledge. It’s every business owner’s nightmare scenario. It’s not as if the company was being run by people who didn’t know what they were doing, Exec Chairman Luke Johnson is a vastly experienced businessman.
So how do things like this happen?
Most serious, sudden financial issues stem from a combination of two things: Systems/Processes and People.
The work of good people can be undone by operating in a chaotic manner, just as a good system can be badly undermined by the incompetent or even fraudulent actions of people. Both areas need to be addressed to keep a business stable and profitable. Some of the key “red flag” factors can include:
- Lack of financial awareness
- Not taking finance issues seriously when raised
- Being reactive and never planning ahead
- Relying too much on one finance individual within the business
- Lack of care around timings so deadlines slip or issues just get forgotten
How can I avoid this happening to my business?
There are three key areas to address to ensure your business finances are safe.
1. Internal controls
Internal financial controls are of the utmost importance to your ability to run your business. Their primary role is to protect your financial and management information from accidental or deliberate misuse. Company directors who don’t have a background in finance often want to make financial controls someone else’s problem. If that someone is an employee of the business, that should be a serious concern. What’s to stop that person making mistakes unnoticed that cost you a significant sum? Or even worse, committing a deliberate fraud or theft from the business? Endorse segregation of duties and apply authority levels so that no one person has total control and deadlines are met.
2. Financial Reporting
This is the measurement of the health of a business, on what’s working or not and taking the remedial action at the appropriate time. It helps you make better informed decisions based on accurate reconciled management information, which helps you plan ahead. Management information should be reviewed and questioned by the Directors and key business stakeholders on a regular basis. They should give a clear, accurate view of your business performance. Encourage monthly finance meetings, with key personnel, to promote productive discussions and proper analysis of your accounts.
3. Cash flow management
Cash flow forecasting and management is a key discipline of financial management for any business. It supports when it’s the right time for growth and whether you require external funding to support your future plans. Cash flow management is critical as it provides evidence of your cash position. If the business runs out of cash, and is unable to raise alternative finance, the business becomes technically insolvent. Cash is the life blood of all businesses – don’t just rely on your bank balances as an indicator of your cash position. Ensure bank reconciliations are carried out, on a regular basis, without it you will not know your true cash position.
These are just three of the areas in which I support businesses to stay healthy and grow. By pre-empting the warning signs you can avoid the sudden need to source external funding or make radical negative company changes.