By Simon Glyn, partner at FRP Advisory LLP, the specialist restructuring, recovery and insolvency firm.
1.Sustainability of profit margins
Often a long debate is undertaken over projected turnover levels, but assumptions regarding margins are equally important. There can be a tendency for businesses to predict forward using current margins, without considering how realistic they are in the current environment.
2.VAT rate increase to 20% in Jan 2011
The VAT increase needs to be considered not just for the numerical impact on cash flow, but for the effect on demand for a business’ products prior to and post the increase.
3.Tightening of Government spending
Whilst clearly businesses that trade directly with the public sector will naturally be considering the impact of reduced government spending on their projected performance, there will be a large number of businesses that will be indirectly affected. Directors need to think through carefully and fully understand potential changes in their future trading and cash flow if they are affected by a detrimental impact on anyone in their chain of customers or suppliers.
4.A second wave of supplier squeezing
There is anecdotal evidence that larger businesses are starting to squeeze their suppliers for a second time, realising that the first round of renegotiations didn’t go far enough. With this in mind, any budgeting process needs to include a robust review of the certainty of existing contractual terms with customers going forward.
5.Fixed asset replacement (“Cap ex”)
During the recession, a lot of businesses have kept cap ex to a minimum to preserve cash. However, the longer the replacement is left, the greater the need to analyse the reliability and competitive suitability of fixed assets when projecting forward as the impact from the incapacity or obsolescence of any important machinery could far outweigh the cost of replacement.
As base rate is very low, any rise will create a significant % increase in interest costs. At 3% over base, a 0.5% rise in the current base rate will result in a 14% increase in interest costs.
7.Exchange rate fluctuations
Businesses’ budgets often include assumptions regarding exchange rates. It therefore makes sense for customers to consider obtaining appropriate hedging products from the Bank at an appropriate time, to give more certainty to the accuracy of their projections.
8.Comparing actuals to budget
There are still too many businesses that produce projections, but then do not monitor them sufficiently throughout the year. It is vital for both the directors and the Bank that the monitoring of projections
(particularly the detail it will include) is agreed at the budgeting stage, is relevant to all parties’ needs and is adhered to.