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Operational Finance

There are several key areas to business continuity planning. These include:

Developing a business continuity plan:
Current position - cashflow
Current position - scenario planning
Current position - sensitivity analysis 
Managing your position - cashflow 
Managing your position - effective use of your reserve
Accounting guidance

If you’d like more information on how your sports business can respond to COVID-19, please contact Greg Rubins or Ian Clayden

 

Developing a business continuity plan

Business continuity planning refers to maintaining business functions or quickly resuming them in the event of a major disruption. A business continuity plan (BCP) outlines the procedures and instructions your organisation will follow in the face of a major disruption and will take into account all key business processes, assets, human resources and financial constraints.

It is important to distinguish between a BCP and disaster recovery, which focuses on restoring IT infrastructure during and after an adverse event. Your disaster recovery plan should form part of the wider BCP to ensure all key business areas have been covered. Further detail is provided here.

Before creating your BCP, it is important to complete a business impact analysis using a variety of methods, as discussed further on this page. Your analysis will assess the impact of a sudden loss of business functions and quantify the associated costs. It will allow your board to review processes across the organisation and determine which are vital for its continued functioning. 

Your organisation should consider appointing a coordinator and/or team with defined responsibilities – and budget – for planning and preparedness. Deputies should also be appointed to ensure continuity can always be maintained. In relation to COVID-19, it is particularly important to ensure plans are subject to ongoing review and scrutiny. Failing to do so will increase the risk of agreed actions becoming obsolete. 

Key steps to produce your BCP: 

  • Identify the scope of the plan and assign overall responsibility 
  • Identify key business areas 
  • Identify critical functions, personnel and activities 
  • Identify dependencies between various business areas and functions 
  • Determine acceptable downtime for each critical function  
  • Create a plan to maintain operations 
  • Continuously review the effectiveness of this plan and ensure it remains current with the present external environment. 

See here for a checklist of considerations for your BCP.  

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Understanding your current cash position 

Cash flow

Understanding available cash and identifying any opportunities to release trapped cash is critical for your organisation in the current external environment. Preparation of a short-term (13 week) cash flow forecast is key and this should be reviewed regularly to ensure it reflects the most recent financial position. This should be supplemented with updated business plans, budgets and forecasts, which will help you understand the potential short- and medium-term financial implications from a liquidity perspective.

Once the current cash position is understood it is important for your organisation to stress test variables and assumptions through sensitivity analysis and scenario planning exercises. This can then be aligned to BCPs to map out steps that may need to be taken, depending on your organisation’s financial position.

Steps to take: 

  • Complete scenario planning and sensitivity analysis to review your organisation’s cash flow forecast using each revised assumption 
  • Consider measures that can be taken to reduce variable cost bases, as well as revenue drivers that can be enhanced 
  • Ensure management accounts are updated on a weekly basis and monitored against your revised cash flow forecasts 
  • Reforecast budgets where necessary and ensure variance analysis is completed in detail to inform future financial decisions. 

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Scenario planning

Scenario planning is a system for deriving and examining a set of distinctly different futures, allowing your organisation to assess and review a number of plausible future outcomes that vary from the most commonly accepted scenario. Once the range of scenarios has been effectively mapped out, your organisation can then create contingency plans for how to deal with each of these alternative futures.

Scenario planning for COVID-19 disruption should be aligned with a financial sensitivity analysis to determine all variables and possible outcomes. This will ensure boards have adequate information for making key decisions around budgeting, strategic revenue streams and any required cost control measures. 

Steps to take: 

  • In addition to COVID-19, identify the key uncertainties in the industry that could trigger significant changes 
  • Discuss the likely ranges of change for these uncertainties within the designated future time period 
  • Map out each of these scenarios across the short and medium term and perform sensitivity analysis on key variables to identify areas of cash flow risk 
  • Create a matrix of scenarios and quantify the likely outcome of each of these 
  • Develop a general strategy for how to deal with each scenario in the matrix. 

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Sensitivity analysis

A sensitivity analysis determines how different values of an independent variable affect a particular dependent variable under a given set of assumptions. Since uncertainty cannot be avoided, it is necessary for your organisation to identify the cost elements that represent the most risk. This in turn will allow your board to consider any steps required for mitigating these risks.

Sensitivity analysis involves recalculating the cost estimate with different quantitative values for selected input values, or parameters, in order to compare the results with the original estimate. Using sensitivity analysis can add value to your organisation because it highlights elements that are cost sensitive as well as areas where increased performance could be achieved without substantially increasing cost. 

Steps to take: 

  • Identify key cost drivers and assumptions for sensitivity analysis testing 
  • Re-estimate the total cost by choosing one of these cost drivers to vary between two set amounts; for example, maximum and minimum or performance thresholds 
  • Document the results 
  • Repeat steps two and three until all factors identified in step one have been tested independently 
  • Evaluate the results to determine which assumptions are key cost drivers and which cost elements are affected most by changes. 

Budget monitoring should be completed against revised financial plans and mapped across the scenarios and sensitivities discussed above. It is important to increase the frequency of reforecasting exercises based on current financial data, as well as any changes made to the external environment. Boards must implement and maintain appropriate governance arrangements to ensure effective information flows are in place to allow the right information to be reviewed by the right people at the right time. 

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Managing your position

Cash flow

Once your organisation has a thorough understanding of its short- and medium-term cash position, your board can take the actions necessary to maintain or enhance it. This could include identifying any opportunities to reduce costs or access additional funding. 

Preserving liquidity during the COVID-19 environment is key for all organisations, and this depends on understanding your short- to medium-term financial needs. Boards can use this information to produce contingency plans to address any areas of risk identified. This work should be subject to ongoing review. It is therefore important to produce regular management accounts and use the most recent financial information for variance analysis.

When seeking to enhance liquidity, here are some key questions to ask: 

  • Have you reviewed all government and charity support programmes for applicable sources of external funding or relief? 
  • Are there any alternative or non-traditional income streams available? 
  • Can VAT and other taxes be reclaimed or deferred? Further detail is provided here
  • Where can variable costs be cut or deferred? Can any stock be liquidated? 
  • Do insurance policies contain business interruption clauses and can these be accessed? 
  • Are bank mandates up to date, accurate and include appropriate contingencies in the event of key staff absence?  
  • Are key accounts payable and receivable controls in place and operating effectively? Is there scope to increase debtor days or increase creditor days without damaging key supplier relationships? Further detail is provided here
  • Is there flexibility in key supplier and customer contracts to amend payment and pricing terms (on both sides)? 
  • What operational contingency plans do you have in place to minimise disruption to the business, including reviewing the people who are authorised to manage bank and systems processes and controls? 
  • Have resourcing plans been factored into your sensitivity analysis? 
  • Do you have access to any strategic reserves or restricted project funding? 

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Use of reserves

Organisations facing financial challenges in the current environment should review whether certain projects, spending or activities can be stopped or delayed in order to focus on essential functions. These costs should already be identified through the steps taken above.

Reserves can be spent to help cope with unexpected events like those unfolding at present. Organisations planning on using these funds to improve liquidity should do so under controlled limits and with high levels of internal monitoring. 

Your organisation should identify which of its funds or assets have limits on their use. If these limits are internal only, the associated funds or assets could be deployed in new ways. If they are externally restricted funds, meaning they cannot be spent at your discretion, then they may only be used for a particular and defined purpose. If there are restrictions, in some instances there may be ways to amend them. However, this would require agreement with the funding partner(s) prior to any disbursements being made. Accessing or releasing restricted funds should only be considered if other options, such as reserves, are not available.  The Charity Commission encourages all organisations to carefully consider the wider and longer-term impacts of making such a decision on their financial resilience and external relationships.

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Accounting Guidance

Guidance is now available to assist in identifying the potential corporate reporting and auditing issues and consequences of the virus. However, given the fast moving and ever changing nature of the situation, aspects of this guidance will change over time. The outbreak is an in-year event and will impact the valuations, estimations and disclosures reflected in the financial statements for periods ending on or after 31 March 2020.  

Going concern

  • In respect of going concern, Directors are required to consider events that have occurred both before and after the balance sheet date when determining whether there is a material uncertainty over the ability to continue as a going concern. Consequently, forecast financial information, sensitivity analysis (which may require additional and/or different potential variances to be included) and compliance with bank and other covenants will need to factor in the estimated effects of covid-19
     
  • A common approach that is developing, and which BDO is encouraging from Directors, in relation to each set of financial statements that are prepared for audit is:
    • The assessment of going concern Directors are required to undertake must be far more detailed than normal to accommodate the uncertainty prevailing and must cover the period of at least 12 months from the date of signing the financial statements. The assessment may not be limited to this period if there are foreseen events or conditions beyond this period which may influence the economic decisions of users
    • The assessment needs to consider the company’s resilience through 3 lenses - Operational capability (closed locations, reduced workforce through illness, breakdown in supply chain), Market-based demand (effect on revenue) and Structural finance (liquidity and access to committed facilities)
    • Directors, as a minimum, stress test the business to assess scenarios considered to represent the reasonably possible impacts on the organisation, and reverse stress test i.e. consider the scenario that could result in the organisation no longer being a going concern. Unless the breaking point scenario is considered remote, this will normally result in a material uncertainty conclusion on going concern which will need to be referenced in the relevant disclosure and will result in a material uncertainty reference in the audit report (albeit the audit opinion is not qualified)
  • The going concern disclosures in the basis of preparation note in the financial statements will also need to be significantly enhanced and would be expected to include at a minimum:
    • The Directors’ assessment of various possible scenarios and their assessment of the impact these may have on the business
    • The scenario or scenarios in which the business would fail and why the directors consider this of remote possibility – together with reasons and rationale
       
  • The auditor’s review of Directors’ assessments must be far greater than normal, will require more evidence, and will continue to be performed through to the point of signing the audit report.

For further insights Click here

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Key Contacts

GREG RUBINS
Partner - Head of Public Sector
BDO Southampton

 

IAN CLAYDEN
Partner - Consumer Markets Group
BDO London

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