Cash management & stabilisation for creative advertising agency

Sector

Advertising agency – This client is an up market UK-based creative agency that provides key support to some of the most ambitious businesses in the country.

Concern

The business was suffering a cash flow crisis due to late payment by its largest client, inefficient accounting processes to match the nature of the business and worryingly, it feared that due to all of its challenges, it would not have sufficient money to pay the wages. accountants-link

To worsen the situation, its turnover from the previous year had shrunk and costs were rising, as management had built up infrastructure for a larger business, so this was also a concern in the long run. It still had a steady inflow of contracts but profitability and cash flow were the major, immediate threat to the future of the business, and had to be dealt with as a matter of urgency.

Challenge

Immediate Challenges:

  • Accounting ledgers had not been written up
  • Supplier invoices had not been posted to the purchase ledger so there was no clear picture of what was owed to creditors.
  • There were significant old unpaid invoices on the purchase ledger some of which were actively being chased by the supplier
  • Cash allocations on purchase ledger were inaccurate
  • Staff Expense claims were missing from ledger or otherwise unpaid
  • There were irrecoverable sales invoices on Sales Ledger
  • No cash flow forecasting in place
  • Management accounts had not been prepared for several months.
  • Profit for the current Year-To-Date was unknown

This was a situation for survivor of two recessions, Chartered Accountant and Finance Director at EFM, Tony Williams – we call him “Big Tone”!  With a track record in delivering practical solutions in ever-changing commercial and not-for profit environments, this Chartered Accountant has gained experience in diverse organisations with key responsibilities around cost control, strategic planning, budgeting, process re-engineering and yes, lots of fire fighting .

Solution

After Big Tone’s investigation, some significant issues came to light. PAYE and NIC were overpaid by almost £50,000. VAT had been overpaid by a huge amount and because invoices had been posted late, in many cases, months after the period VAT returns had been submitted, the input VAT had not been claimed. Payroll adjustments had not been processed, including pay rises, student loans, and PAYE codings. Statutory accounts for the last year were inaccurate and profits overstated and therefore the corporation tax liability that was due was wrong. The actual liability was zero. No P11d dispensations and PSAs (PAYE Settlement Agreements) were in place. Payroll returns had not been made for several months.

Big Tone, supported by Gary Jesson and the rest of EFM were able to set a strategy using their complimentary skills. Big Tone’s solution was a detailed 5 -step process to ensure the most efficient and profitable outcome for the company:

  • Step 1: Our priority was to manage the cash and stabilize the business. Payment plans were put in place with several suppliers including two who were owed £200K between them, some couldn’t be paid because the invoices couldn’t be located, and others just couldn’t be paid! Issues regarding staff expenses and payroll adjustments were resolved as a priority as the company needed staff goodwill.  A cash forecasting exercise was undertaken and the company approached the bank for funding/ an overdraft facility,  but impressively, this has not been required.
  • Step 2: Was to reconcile the remaining balance sheet accounts at which point the PAYE and VAT overpayments came to light. After several months of correspondence with HMRC, as well as a trawl through 3 years worth of accounting records for all payment details, a repayment of almost £50,000 was received. Management accounts were designed so that the company could understand when there were under or over-spends and it became obvious why the previous years accounts were misstated by a huge amount. Revenues and costs had to be matched to prevent the peak and trough scenario, and budget more accurately.
  • Step 3: Was to implement a Travel and Expenses Policy and ensure that going forward, expenses are properly submitted.  This needed to happen before P11d dispensations can be applied for,. A by-product was happy staff who finally recognised the finance team had a grip of this and had introduced some rigour and regularity over settling claims.
  • Step 4: Was to claim repayment of overpaid VAT which also involved an extensive trawl of the ledgers for the period and verifying VAT balances. Again, an adequate explanation had to be provided to HMRC for why this error had occurred in the past as the basis for the claim.
  • Step 5: Given the state of the accounting ledgers, it was important to finalise the PAYE and VAT issues and then submit 2012 accounts with an accurate balance sheet. A new, integrated system was implemented to deal with complex accounting, proposals and budgets as well as time management and resourcing so that staff time and costs could be effectively measured against fee income- an issue the company was struggling to deal with. This meant that Account Directors and Senior Management understood their real costs within the business and would be able to access key data without having to first ask accounts to ‘produce another spreadsheet’.

Result

All of this ultimately results in costs savings for the company –  they would need less of Big Tone’s time and the management team would spend more time on core revenue generating activities, instead of trying to reconcile data and make sense of the numbers.

Benefit

The outcome of this was that £104,000 of taxes was recovered and the client now has positive cash flows. The business’ accounting stabilized, giving the directors a clear picture of the state of the company. The business now has a new software package that will provide a platform for the future growth of the business and it will be profitable this year!

More about EFM’s  Tony Williams