What We Can Learn From Wilkos’ Administration

The UK’s high streets have endured considerable change in recent years as a result of shifting consumer habits, the rise of eCommerce, and the global pandemic, with many household names falling into administration and bankruptcy. And now, another long-standing name has succumbed, as Wilko has closed all of its stores and shutters have fallen for the last time on nearly a century of retail trade.

However, Wilko’s downfall can be directly attributed to a series of unwise financial decisions that led the company to the brink. In this article, we’ll explore the causes behind the crisis and consider the importance of management accounting and cash flow management for small businesses looking to thrive in an unpredictable marketplace.

How Wilko’s Finances Led The Retail Giant To Ruin

Wilko’s administration can be attributed to a series of unwise financial decisions that ultimately pushed the company to the brink, such as:

  • The sale of a 1.1million square metre site to DHL for £48 million, which DHL sold within two months for £88 million.
  • The awarding of over £77 million in dividends during the last decade, even during periods of loss.

Yet the pressures on the retail sector as a whole were hardly unknown: despite enjoying strong growth through the first half of the 2010s, Wilko’s problems were compounded by the Covid-19 pandemic and lower consumer spending, as soaring energy costs and mortgage rates hit home. Ultimately, ill-advised choices exposed the company's financial vulnerabilities when external factors impacted; administrators at PwC confirmed that these contributed to ‘cashflow pressure’, which raises questions about the role of management accounting and cashflow management in preventing the crisis.

How Management Accounting Could Have Anticipated Trouble Ahead

Arguably, the root cause of Wilko’s financial troubles can be traced to poor cashflow management. A robust financial and management accounting system should have flagged risky actions as they would drain vital resources from the company when they were most needed. The failure to recognise the potential consequences highlights the critical importance of proper financial planning and analysis.

The dire state of Wilko was further exacerbated by their inability to compete effectively with rivals like B&M, who offered similar products at more competitive prices. Management accounting could have been instrumental in identifying this problem, enabling managers to devise strategies to cut costs or adjust pricing to remain competitive. Instead, Wilko found itself gradually losing market share and profitability.

The Importance Of Cashflow And Profit

An important aspect that often eludes small business owners is the distinction between cashflow and profit, and the information they provide about the current and long-term health of the company.

Cashflow is the movement of money in and out of your business within a specific timeframe. Cashflow is a key indicator of business health and is crucial for assessments by lenders and investors.

Profit is a powerful indicator of your business’s success at any given moment of time. Defined as the amount of revenue left from your sales proceeds after costs have been deducted, profit is an overall indicator of financial health. 

While profit is vital for long-term sustainability, cashflow is the lifeblood of a business in the short term. While profit will show you the immediate success of your business, cashflow is a more accurate way to measure your business’s long-term financial outlook.

For small businesses seeking to thrive in competitive markets, managing cashflow effectively is essential. Many businesses have faltered despite being profitable on paper because they did not have enough cash to cover immediate expenses and pay suppliers. A disconnect between profit and cashflow can lead to insurmountable challenges that render the business unviable.

Contact Vanilla Accounting For Expert Management Accounting

For small business owners, it is imperative that they have accurate up to date financial information about the financial position of their organisation. To find out more about how management accounting can help you to understand your business more astutely, please get in touch today.

Image source: Canva

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