In the second of our guest blog series, we would like to welcome Simon Carvill-Biggs, a restructuring advisory partner at FRP who will explore some of the key steps that business owners can take to ensure they remain ahead of the challenges posed by the current pandemic.
The last four months have been arguably the most challenging period most business owners can remember. Indeed, for many, the economic shock of lockdown has far outweighed that of the financial crisis of 2008.
But, while it has been a period of great difficulty, it has also been a period in which businesses have demonstrated their resilience and ability to weather the storm. Those that have done so best are those that have sought advice and put reactive plans in place quickly.
Government intervention has provided a lifeline for those less agile, but we are reaching a critical point as the job retention scheme tapers off and lockdown restrictions lift whereby business owners need to have a plan in place for the months ahead. The likelihood of a return to ‘normal’ is incredibly slim, which means stressed businesses should be looking at how they will manage their way to better health in the next 12 months.
This may not represent a complete rebound but, for many previously healthy businesses, will provide a stable platform for future growth.
Spotting symptoms of financial stress
Financial stress manifests itself in many ways and being able to spot these signs and take action to either mitigate or overcome them is part and parcel of running a successful business. Deteriorating KPIs or adverse performance such as a reduced order book can signpost a number of things including a change in your sector or market, or perhaps a step change in customers’ buying habits.
COVID-19 has caused a huge cultural shift in the way we exist, work and interact. Undoubtedly this will manifest itself in how our goods and services are consumed. Demand or requirement may well fall and conversations should be had now with your key customers to see if that service is still required.
Watch the forecast
Something that we would always request a business to prepare is a cash flow forecast – something that has become increasingly difficult during lockdown. Quite simply, forecasting gives you a road map of when your business is going to hit important peaks and troughs. As a baseline it only needs to be your best guess built on your pipeline of work/planned receipts, then adapted to show scheduled payments such as PAYE, rent, wages etc. Sensitivity analysis at a rate of plus or minus 10% will give you a reasonable margin for error, depending on your sector, seasonality of your business or how prudent you wish to be.
Reduced liquidity is another key symptom of stress in a business and without some kind of cashflow or funds flow statement, a business could possibly not see an issue until it can’t meet the wage bill at the end of the month. If the forecasting reflects a tight or hardcore overdraft or a negative operating cashflow, then it is time to take a look at the working capital cycle and to understand how debtor payments, liabilities and funding arrangements interact. This may be a timing issue on debtor receipts, something potentially identified by noting debtors moving into the right hand column of the receivables ledger, or an increase in working capital requirements; such as to fund stock purchases.
Sharing the load
The phrase ‘cash is king’ has been used as a strap line by accountants and business advisors for years and whilst I am no stranger to using it myself, currently ‘cash management’ appears to me to be more relevant. Managing stakeholder relationships well will ultimately assist in obtaining continued forbearance and agreeing mutually agreeable payment terms. Remember a creditor on a ledger is a debtor on someone else’s – unlike other crises, we are all in this one together so there needs to be a collaborative and open dialogue to create positive solutions for all concerned.
It is going to be a rocky road ahead but staying aware of the warning signs and seeking guidance as early as possible will provide a strong starting point towards recovery. Ultimately, how businesses react and adapt to COVID-19 will determine their own viability and shape the future of the UK economy for a long time to come.
For more information on staying on the front foot during the pandemic, visit FRP’s Corporate Resilience hub.