A tough finance director will make or break many a firm in 2011

The effectiveness of the finance director will make or break many firms in 2011 warns business planning and forecasting specialist Numeritas.

Its financial models looking at the impact of financial pressures facing UK business in 2011 highlight that toxic customers and gung-ho sales teams are the biggest threats many face.

Stephen Aldridge, managing director of Numeritas, said: "With both inflation and economic growth picking up, but working capital still in short supply, successful businesses will be those with a strong finance function keeping a tight control on customers and the sales team.

"We have constructed financial models for example businesses in a number of sectors to look at the threats and opportunities in 2011 – particularly as VAT goes up to 20% at the start of the year and National Insurance increases in April too.

"While these will have different effects on different sectors for the vast majority of businesses, those that sell to other businesses rather than the public, the effects of higher VAT and National Insurance are marginal.

The big threats come from "over-trading", through sales increasing without there being sufficient working capital to pay the additional sales, and from customers taking a long time to pay or becoming insolvent and not paying at all.

"A company's finance team will very much control the destiny of firms in 2011 – if they are tough with customers and get bills settled quickly then they will do more than just boost vital working capital. They will also guard against the biggest danger facing most businesses – a write off from a large customer becoming insolvent. When a company goes down it is sadly like the Titanic sinking, it sucks down everything around it - and avoiding large outstanding debtors is vital to avoid insolvency in 2011.

"The finance director also needs to be tough with his company's own sales team – reliable customers paying profitable prices with good payment terms are to be welcomed. However, over-exuberant sales at low prices to businesses that will pay late, or not at all, will be toxic in 2011."

Financial pressures facing firms in 2011 include:

- Employers' national insurance up 1%

- VAT up from 17.5% to 20% - Customers taking longer to pay (if a few large clients take longer to pay, this marginal increase can have a particularly adverse effect on cashflow)

- Clients becoming insolvent and their debts being written-off (this has a particularly devastating effect on both cashflow and profitability)

- Taking on more staff (rather than better use of existing ones) to deal with expected new orders!

By Gary Howes

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