What is financial control? Financial control is the financial management, policies and procedures within an organisation that governs the availability, use and monitoring of financial resources. With insolvencies at a high level and economic uncertainty persisting, financial control is one of the primary ways in which the directors of a business exercise their stewardship. Financial control problems distract businesses in a number of ways as we will explain below.
Financial control problems
A lack of financial control manifests itself in a cornucopia of ways, such as:
- Insufficient cash to pay debts as they fall due
- A business managed by cash
- Increased debtor days and bad debt
- Increased queries from creditors
- Cash tied up in stock
- Unclaimed refunds, rebates and cash
- Waning profitability
- Major recommendations from internal or external auditors
These are just a few of the challenges for a business without a sound financial control framework. At best, they are inconvenient truths that we live with as a small business. At middle, they are an anathema to business change, investor relations and sustained profitability. In the worst cases, it leads to financial collapse as businesses fall into insolvency, seek a buyer, lose staff and close operations. So, why do so many businesses accept the status quo?
Distracting financial control problems
Despite the enduring pain that besieges a business with financial control problems, they often persist. Many businesses make sufficient profits to co-exist with a certain amount of ambiguity. After all, if you currently make ‘enough’ money or shareholders are passive, you may ignore such issues for a while.
Here are 5 distractions caused by financial control problems:
- Change is difficult if there are underlying financial problems
- Forecasts are unreliable without good financial control
- Investment is risky without reliable financial performance
- Finance resource is consumed transactional issues
- Banks, lenders and investors seek further reassurances
Company directors are responsible for governance and stewardship over their business. Under Chapter 4 s393 of the Companies Act 2006[1], it says:
“The directors of a company must not approve accounts for the purposes of this Chapter unless they are satisfied that they give a true and fair view of the assets, liabilities, financial position and profit or loss”.
There are lots of requirements on company directors and financial control is one of them. It is important to note that the accounts must give a true and fair view that directors must personally certify. We also know that it’s hard to make business changes that drive long-term performance. In summary, financial control and long-term growth in profitability are not mutually exclusive.
Examples of financial control problems
There are many examples of financial control problems, such as:
- Bulb, the gas and electricity supplier, collapsed in November 2021 leaving more than 1.5m energy customers facing uncertainty. Bulb required a Special Administrator, appointed by Ofgem, to continue running the business. The cause of collapse is due to the dramatic rise in wholesale gas prices and the energy price cap set by Ofgem. Ultimately, cash ran out as wholesale prices increased beyond long-term forecasts.
- Ted Baker, the high street fashion retailer, unveiled a £58m accounting error in January 2020 from an overestimation of the value of stock. This led to some restructuring of the business and the closure of stores.
- Patisserie Valerie, the café and cake chain, disclosed in October 2018 that it had “significant, and potentially fraudulent, accounting irregularities”. The black hole was eventually valued at £94m. This led to the departure (and arrest) of some senior figures as the chain collapsed. The cause of the collapse was allegedly an overstated cash position by £30m and additional overdrafts of £10m.
- Carillion, the construction and outsourcing giant, collapsed in January 2018 with debts of £7bn – more than their annual turnover. How did this happen? The ongoing investigation will eventually reveal the full extent of the issues. However, some claim that the firm underestimated the costs of delivering high-profile contracts.
Overcoming finance problems
Private limited companies may qualify for an audit exemption if it has at least two of the following criteria:
- an annual turnover of no more than £10.2 million
- assets worth no more than £5.1 million
- 50 or fewer employees on average
In these cases, small companies are reliant on their external accountants or internal finance team. They are also without an external audit and, in general, do not invest in internal audit. As a result, internal controls may need improvement and accounting errors go unnoticed. Worse still, fraud, theft, losses, money laundering and scams may be commonplace.
An audit, either internal or external (or both), is not a panacea, as seen in the examples above. So, what is the solution? Ideas range from training to directors with an accounting or finance background (as is the case for nearly half of the FTSE 350) or a management team supported by third-party experts.
Thinking beyond accounting headaches
Here at Think Beyond, we support you when you need to accelerate your business performance. With one of our founders experienced in accounting and finance, no stone is left unturned. Steven has experience as a director, as part of management teams, leading finance departments and working with external and internal auditors. On many occasions, he was called into roles to troubleshoot poor financial results and financial processes.
Why not find out a little more about Steven and our business approach. There is also a summary of our change services but we go way beyond this if you need support.
If you would like to understand how to leverage a Chartered Accountant and former Finance Director, call now on 01565 632206 or email sales@think-beyond.co.uk
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[1] https://www.legislation.gov.uk/ukpga/2006/46/part/15/chapter/4