How COVID-19 made bookkeeping more important than ever

Back in February 2020, when the COVID-19 pandemic hit the UK, bookkeeping became arguably the single most important thing for 1000’s of small businesses – in particular, those businesses that were affected by the national lockdown and changes in buyer behaviour.  That is quite a big statement.  Let me tell you why I believe this to be the case.

First off, uncertainty in business throws up many questions and challenges.  All of them relate to bookkeeping in one way or another.  

For example, we need to know how much cash we have at hand and how long we can continue to trade for with reduced, or in some cases, no new sales.  To know that, we must have a clear view of our ongoing costs and obligations.  What are my total monthly outgoings?  How much do I owe to HMRC? How much am I owed by my customers?  How much do I owe my suppliers? Etc.  Unfortunately, at the start of the COVID-19 pandemic, many small businesses were unable to answer these ostensibly simple questions.  

Once we have established how much cash we have, we can then work out how long our runway is and how much more cash we might need to get through to the other side.  The chances are, for most small businesses, a loan will be required.  Then it’s a question of how much do I need to borrow, and can I service the repayments?

The UK government tried to help with this by creating the CBILS scheme and underwriting some of the debt to make it easier for banks to lend money.  The application process required quite a lot of information including management accounts and a cash flow forecast.  For many small businesses, these two requirements were impossible to meet because their bookkeeping was not up to date.  It resulted in a flurry of activity to bring the books up to date and generate the management accounts and cash flow.  It was at this point that many organisations realised that their business was not trading anywhere near as profitably as they thought.  Consequently, their applications for CBILS loans were rejected.

Fortunately, due to the ongoing Covid-19 crisis, the government stepped in again.  This time, with the Bounce Back Loan (BBL) scheme whereby they would underwrite the entire amount loaned by the bank up to a maximum of £50,000. There was a simple application process that did not require the detailed information of the CBILS scheme to speed things up. Tens of thousands of small businesses took up these loans.

This whole episode was a stark reminder that we never know what is around the corner.  To be prepared for unforeseen circumstances, it is essential that businesses keep on top of their bookkeeping.  It should be part of your routine.  Depending on the type and size of your business, the books should be completed monthly as a minimum.  You should be reviewing your debtors (people who owe you money) on at least a weekly basis so you can get the money you are owed.

You should also create a cash flow forecast that is updated on a regular basis – during the first lockdown, I updated my cash flow every day, so I had a clear view of my cash requirement going forward.

Bookkeeping should not just be about survival during an emergency.  It should be about good financial governance of a business.  By keeping on top of the books regularly, it is easy to identify where your profits are, where your costs are and it gives you the ability to accurately forecast for various scenarios going forward.  It is also the best way to manage your credit control.

The need to stay on top of your bookkeeping and the challenge of credit control is not a product of the Covid-19 outbreak.  According to a study by digital banking platform Tide in Jan 2020, businesses with between 10 and 50 employees are owed on average £13,000 and the average UK SME spends 1.5 hours per day chasing late payments to the value of £8,500.

More worrying is a survey in November 2019 that showed debt to UK SME’s had risen to a whopping £23.4 billion.  The number of businesses experiencing overdue payments reached 54% – the highest since 2015.

By adopting good bookkeeping practices on the latest cloud-based accounting systems, businesses can get a clear view of what they are owed and take advantage of numerous complementary apps to automatically help them chase debt.  If the books are kept up to date, these apps can automatically chase your customers for payment with absolutely no effort from you.  Some even offer a debt recovery service if the invoices are not settled.

These good practices will also enable you to take advantage of cash flow forecasting solutions that provide all the detail you need to get a grip of your cash.  There are literally hundreds of apps to support small businesses and free up your time to focus on what you are great at – running your business.  The trouble is, they all require that the books be up to date and accurate.

In summary, if you really want to take control of your business and either survive or thrive in this uncertain Covid-19 world, recognising that bookkeeping is more important than ever is the first place to start.  Without it, you are flying blind.