• November Partners

How small businesses can mitigate cash flow issues caused by COVID-19

Updated: Sep 6, 2020

Five immediate action points for Entrepreneurs and SME business owners to action in the face of a COVID-19 working capital crunch

Whilst the past decade has presented several challenges for small and medium sized enterprise (SME) business owners and entrepreneurs across Britain the impact assessment for COVID-19 is truly unprecedented. Even before COVID-19, there was huge uncertainty with Brexit, trade wars, changes in government and policy. In addition, the ever-increasing costs in doing business in Britain, from wage inflation to added regulation, have been strenuous as business owners have been unable to be pass on these costs to their customers or clients. Business owners and their management must be commended on their skills for having got through to 2020 noting the above difficulties.

In relation to the potential fallout from COVID-19, here are five action points which could provide practical assistance to management in planning and preparing for a potentially catastrophic working capital crunch in the coming months. For those who believe the virus is scaremongering or a conspiracy, that’s fine, there absolutely would be no harm to go through these motions to be prepared for any market challenge that presents itself to your business at any time.

1. Accounting, projected cashflow and cost control

Ensure your accountant brings your books up to date, so you have full visibility of your balance sheet to accurately have a position on cash, accounts receivables and accounts payables. You can build a cash flow projection for the next two quarters, projecting a base case and worst-case projection which you can consider. The projections will highlight categories where you may be able to cost control. In general, we would recommend you cut back on all non-essential business expenditure, such as training, entertainment or upgrades, i.e. halt all expenditure on ‘nice to haves’ and keep ‘must haves. This includes a potential hiring and capital expenditure freeze.

2. Open and raise all lines of communication to stakeholders in advance of a potential crisis

Strategies of burying your head in the sand will lead to anxiety of the unknown, and whilst things will eventually blow over, this is a pivotal moment for business owners to show true leadership grit in the face of adversity. By communicating to your customers, supplier and employees, this will show all stakeholders that you are taking your responsibility as a director or owner of a business seriously which will result in attaining their best responses, support and outcomes.

a) Collections: Ensure you reach out to all your clients and tell them you are open for business and require payment on amounts overdue to support. Where appropriate, look to offer incentives to encourage immediate payment, even if you have to take a small haircut.

b) Accounts payable: Ensure you reach out to you key suppliers as you may be able to enter agreements to spread the amounts due over a longer period to keep the supply chain moving, or even offer immediate payment if a discount is offered and accepted. Management should take this opportunity to reassess old standard deals and pricing from suppliers and try to leverage and capitalise off past goodwill. It is the perfect time to reevaluate all suppliers and renegotiate more competitive deals primarily in the short term but also lock in more favorable longer-term pricing. It is also a good time to check the insurance coverage as you do not need any further uncertainty at this time. Review each policy to ensure, not only are they current but the cover captures all the exposure of your trading activities.

c) Funding and financing: On March 10, 2020, the Bank of England has already reacted by voting unanimously to reduce the Bank Rate by 50 basis points to 0.25%. This will help to avert a crisis to support the economy and business owners to reduce their cost of borrowing. It is recommended you discuss ideas with your bankers to see how they can help. Whilst the mechanics are currently not clear, the banks have signaling their intention support business by opening lines of credit as an when required. Therefore, in order to secure this potential funding without delay, it will be vital to get your books and records up to date and have the necessary information to hand. Be patient and prepared for a lengthy detailed discussion with your bankers as their support will undoubtedly be key to your business survival.

If the business is backed by private equity or venture capital, it is important to keep your portfolio manager informed, he or she will be having to report up to the Board, and will be getting a number of request for financial support or cash calls from all businesses within the portfolio. Therefore, you want to be at the front of the queue, demonstrate your competence and have all you financial and operating information ready to ensure they will be confident to continue their funding program.

3. Employees and contractors

Your employees will be concerned about their own family’s health and finances at this time. There should be a calm but frank discussion about the liquidity of your business and what your plans are to mitigate any risks. Most employees will understand that this situation is completely outside your control, however they also would be relieved to know there is thought and a plan in place to navigate through the next 4 to 8 weeks. This leadership is critical at time, as employees in turn will have to go home to explain the situation to their own families with the same level of detail and importance. Ideally a risk analysis of the company’s operation, workplace practices and processes should be reviewed to look cut the spread of any virus and further identify any areas where the business could become lean via a headcount reduction.

It is also a good opportunity for team building events to reinforce that all employees are part of one team, and they should pull together and recognise their actions are important for the greater good of their colleagues, and ultimately the company and the local community. In times of crisis a strong clan and dedicated team will stand a better chance of survival against the competition.

4. The Government 2020 budget and tax authorities

Rishi Sunak, the Chancellor of the Exchequer, delivered the first Budget of the new decade in courageous manner. The budget has provided various support for business owners across several areas, including business rates reductions, employee and contractor payment support and other financial and practical assistance. For example, the Budget will provide £3,000 cash grant per business for the smallest businesses which could reach up to 700,000 businesses and to help them cope with the expected disruption.

We recommend you take professional advice to get all the relevant benefits and allowances reflected in your business without exception. The tax authorities can also be potential supporters if it can be agreed with HRMC that any immediate or upcoming payments due if can potentially spread over a longer period to help manage your cashflow, and in turn they agree waive any potential penalties.

5. Liquidation

In the event your business has already been struggling, loss making or thinly capitalised to the point where creditors are already nearing the front door, it may be time to consider a member’s voluntary liquidation (MVL). Considering a potential working capital crunch is likely for many businesses during April and May 2020, owners may find themselves in a situation where the only option is to enter administration or liquidation. There of course is no shame in this, its business after all, and when the market is presenting a set of exceptional circumstances, you need to remain resolute by removing emotion and act fast - an MVL costs can start from GBP 5,000.

In general, it is recommended that you take some control of this situation by rapidly arranging your team and financial affairs in the effort to best manage and avert any potential crisis. Seek help from your accountants and business advisors to ensure a practical plan is put in place early to best manage any eventuality.

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