Corporate Debt: Forecasting, Finance and Flow
Posted on 7th March 2022 at 14:20
It is very easy to make a number of assumptions about the issue of corporate debt. It is often assumed, for example, that debt in general is a bad and damaging thing, and that it is usually the result of poor financial management or ill-advised decisions. It is also often assumed that corporate debt issues make bankruptcy and liquidation inevitable. While these things are sometimes true, there can be other possibilities, factors, and alternative outcomes to consider – all of which can be influenced by the processes of forecasting, finance and flow.
The power of accounting processes
Business accountancy is not just about profit, loss, and the filing of taxes. Though these things are all essential, it is also important to harness the power of wider accounting processes in order to effectively manage corporate debt. Doing so enables your business to understand its debts, plan for repayments, and deal with corporate debt solutions where necessary.
Every business needs accurate accounting forecasts in order to plan and manage in both the short and long term – even brand new start-ups. In the first year of trading, forecasting is informed largely by the business plan and the tracking of investment. From the second year onwards, historical accounting data can also be utilised to increase the accuracy of all financial forecasts. These forecasts should include all expected income and expenses, as well as detailed analysis of the impact of any anticipated market disruption. For example, a comprehensive review of customer and supplier contracts would have provided valuable insight into the effect of Brexit and the LIBOR/SOFR transition on any commercial operation. In additional to being a valuable planning tool in this way, forecasting is also necessary for securing further investment and finance.
Finance is a term that is sometimes used interchangeably in business, to refer to a number of operational and management aspects. The correct usage, however, is in reference to sources of money. Launching and expanding a business is expensive, and finance is necessary to fund such endeavours. In this way, finance relates to corporate debt, because the acquisition of finance can involve borrowing money as well as attracting investment from stakeholders. Finance also relates to forecasting, because it is vital to take all finance commitments into consideration when analysing accounting expectations.
Cash flow is the lifeblood of a business, and it is important to develop a full understanding of how it works. Cash flow specifically measures the amount and rate of money coming into the business, against the amount and rate of money flowing out of it. This measurement forms the core of the overall forecasting process because it demonstrates the projected liquidity and resulting potential for growth of the business. This measurement is different to the calculation of profit and loss.
It is in no way an overstatement to acknowledge the fact that the use of these accounting processes can mean the difference between the success and collapse of your business. Applying the techniques of forecasting, financing and cash flow analysis correctly ensures that business leadership stays ahead of any financial issues – particularly as they relate to corporate debt.
Using these processes to maintain full control of the current and future financial picture of a business enables business leadership to make decisions that are fully informed and well-timed. Timing is vital when it comes to dealing with corporate debt because an early intervention can allow for a wider range of options to remain available. A pro-active approach helps the retention of control, while simply responding to issues after they have arisen can often mean it is too late for preferred action.
Choices are key
With the strict application of essential accounting processes, businesses can make better choices – and choice is key when it comes to dealing with corporate debt. For example, stringent accountancy provides scope for better choices in terms of the type of corporate debt a business opts to take on. Accurate forecasting and cash flow analysis helps to inform the sources of finance that a business chooses to approach and allows for the business to find the most appropriate finance deals, as necessary.
Corporate debt can still become a problem, however - even with the most vigilant accounting processes. In these cases, accurate forecasting and cash flow analysis can identify the potential issue well in advance, enabling the business to select a preferred outcome, rather than finding itself at the mercy of creditors, costly legal action and compulsory liquidation. Alternative options include:
Creditors Voluntary Liquidation (CVL) – Initiated by Directors and Shareholders when a business cannot meet its liabilities. This helps to support employees and protects Directors and Shareholders from creditors and ongoing debt.
Administration (ADM) – A formal insolvency procedure designed to rescue the business as a going concern wherever possible. This secures the status of employees and protects Directors and Shareholders from creditors and legal action.
Company Voluntary Arrangement (CVA) – A formal, bespoke agreement between a business and its creditors. This allows the business to continue trading while making agreed contributions to clear debt.
In the case of each of these options, it is necessary to engage the services of licensed Insolvency Practitioners. In addition to providing advice and guidance tailored to the individual position of the business, Insolvency Practitioners can act as Supervisor of any agreement between a business and its creditors, acting as an appointed third party. While this is often a legal requirement, it provides practical benefits for the business in terms of relieving the pressure and stress caused by direct contact with creditors.
Smith & Barnes Insolvency Practitioners boasts a team of highly experienced, licensed professionals, and provides a low cost, fixed fee service. By developing a thorough and comprehensive understanding of your business position, the Smith & Barnes team can provide bespoke corporate debt solutions that are specifically designed to deliver your preferred outcome. Whether the ideal scenario is continued operation, or the winding down of the business, Smith & Barnes Insolvency Practitioners is ready to help you today.
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