Everyone accepts that these are difficult times and that none of us have been here before. So, by far the best option is to be realistic in your forecasting both on sales and on costs. Doing business will become more expensive as disrupted supply chains appear, reduced volumes lead to high unit costs, and the potential for increased labour costs incurred as firms try to adopt and adapt to the requirements of hygiene, social distancing and working from home to name a few.
Changes to legislation should benefit businesses in the long term
Changes to the laws introduced by the government in April – the Corporate Governance and Insolvency Bill – do offer directors some protection during this time. The act creates some head room to allow directors to make decisions that are in the best long-term benefit to the company. But they do not protect against wilful wrongful trading. If a director is not sure, then advice should be taken. Furthermore, we still must keep in mind that ignorance is no defence. Gather facts, make sure you have researched and understood the challenge and then make a choice or decision. And make sure you document those decisions.
Seven steps to help businesses get through this
There are some simple steps that a firm can take now, as we move into the Autumn and Winter months, to prepare for a recovery from the pandemic and avoid where we can the potholes of a recession. This is not a little tablet that will solve all the problems, but it is a start in having some of the foundational work done to allow managers to make better informed decisions about the coming months.
1. Timely management information: have monthly reports on turnover, costs, cash etc. Do not rely on bank balance management. Develop simple P+Ls and balance sheets and, if in doubt, seek help from your accountant or a professional adviser. All too often we see directors and business owners who look at their order book, consider what the potential orders might be, check the bank account and assume that they are in control. This method may work for some and may have been a quick pointer in the past, but the waters are stormier now. This does not recognise additional costs, loan repayments, unpaid debt, delayed lease or mortgage payments etc.
2. Create cash flow forecasts that cover the short and medium term: at this stage, you should be looking ahead to the first quarter of next year as a minimum. Sensitise this to see at what level of sales or costs does cash become tight. In these times this is probably the most valuable instrument in any business. Failure to have one of these leaves the business and the directors in a more challenging position. Make sure there is a robust and honest cash flow forecast in place that runs out well beyond the end of the year so that it covers the period of the end of transition. Purely completing this task will force a director to look at and understand where all the revenue and cost opportunities are and will give a clear picture of what cash will be available at any time. Remember it is just a forecast and this changes so it should be updated monthly and preferably weekly. Knowing when a business might run out of cash or cash becomes tight is not the end of the world – actions can be taken to address these short-term challenges. What is more challenging is to run out of cash and not even know it was happening.
3. Assess your supply chain resilience: check to see if your supply chain still works to the same levels and costings. Look at the politico/pandemic scene across the world and see if it impacts. Don’t assume that just because you buy it in the UK that the exit from the EU won’t affect you. If it is sourced in the UK where does that supplier get their raw materials or labour? Both the pandemic and Brexit have had an impact on supply chains. That impact, at worst, is failure due to a supplier or a supplier’s supplier failing and therefore causing an interruption. Additionally, the impact may be volume. Failures in your supply chain may draw volume to others therefore jeopardising a company’s ability to meet orders. And finally, others are feeling the additional costs of doing business due to reduced volumes, social distancing and so on. A company’s material costs may rise as a result of an increase in price of goods. Brexit could impose tariffs and delays which at this stage are unknown but will kick in on January 1st.
4. Review your markets considering Brexit: there are a series of questions you should consider:
The questions are endless and some or all will apply to any given company. We have not yet found a company that will not be affected by Brexit so careful consideration needs to be made of the impact, how to mitigate it and the costs involved.
5. Develop strong relationships with your landlord, your lender, HMRC and other major creditors: you should work with them and not in isolation. Most lenders and creditors are supportive of businesses that face challenging times. We need to keep in mind that they too are part of the supply chain and operate as part of a wider network, so it is not in anyone’s interests to make unreasonable demands on a business that may force it into difficulty. And it is likely that they won’t if directors in businesses that may be challenged have behaved openly, developed an honest rapport and relationship, and have worked with the creditor to solve the problem. It is accepted that some may be more challenging, but again there are professionals who can help. The end of landlord forbearance at the end of this month is seen as a potential tipping point for legal actions against commercial tenants who have not been reasonable with their landlords. Act now before it is too late.
6. Be realistic: you cannot see around the corner and forecasting is difficult. Sensitise your forecasts to what you have learnt from the market and potential down/upturns. Be practical. Don’t be over-optimistic. In times of financial uncertainty, aggressive budgets are additionally risky. Be pragmatic and then look at the worst-case. Make sure you test the budget so that you are sure that it works. Make sure you look at the worst case so you know the signs to look for and what issues you may have to deal with if you get to that point.
7. Seek advice from a professional: professional firms want to help. They want companies to survive and grow. We are not ‘undertakers’. We are allies. You do not need to be in deep difficulty to justify a conversation and it is always worth having that conversation even if you just want to clarify a point or test your thinking.