Restructuring Advisory Partner Tony Barrell explores the key areas management should be considering in their planning, including a downloadable checklist.
Since the start of lockdown, businesses have spent time stabilising their cashflow position to enable them to manage through the next few months. This will have included working with key stakeholders to negotiate payment holidays, agreeing time to pay arrangements with HMRC, furloughing staff under the Government’s Job Retention Scheme and potentially seeking further funding from lenders.
With lockdown to be continued well into May, it is vital in this period that businesses’ attention now turns to planning for the recovery so they are ready to implement their plans and react rapidly to the risks and opportunities in the upturn.
In any crisis, there are three stages – stabilisation, review of the position and options (planning), and implementation – and this crisis is no different. From experience of previous downturns, more businesses enter insolvency in the recovery stage than in the downturn due to lack of cashflow to fund working capital. With that in mind, planning for the event of downside risks, strong cash management and working with key stakeholders will be key. Consequently, the planning stage should focus on three main areas:
Each area is explored below, and the key considerations have been included in a downloadable checklist on this page.
It seems very unlikely that the economy will return to normal and management will need to take a view on the shape of the economic recovery; will it be V (rapid recovery), U (slow recovery) or W (recovery followed by another downturn) – and over what period. It probably won’t be V-shaped but hopefully it won’t be L-shaped either.
Other areas management will need to consider include how the cost base can be reduced or made more flexible. A difficult decision to be faced by businesses once furloughed staff return to work is whether they are all still required. A positive coming out of this crisis is the reduced travel costs (and potentially reduced future office costs) delivered by increased working from home. It would be a shame if we didn’t learn from this and things went back to the way they were. That being said, businesses will also need to adapt to permanently managing teams working from home and dealing with team wellbeing.
Considering the above and other factors in the checklist, management should prepare a base plan and 12-month forecast, together with different scenarios, showing the impact on trading results and cashflows to stress test and identify contingency plans. Depending on the size of the potential funding requirements from downside scenarios, if it cannot be managed then a business may also need to consider alternative options such as a sale or restructuring.
The rolling 13-week cashflow commented on in our COVID-19 insight 13: an important cashflow number will remain a key management tool in the implementation stage post-lockdown. Management will need to continue to adopt a hands-on approach to cash management to retain liquidity in case of further risks and restrictions.
The rolling 13-week cashflow forecast, will need to be updated from the stabilisation stage, when cash inflows and outflows were minimal, to take account of recovering sales, current trading terms, agreements in respect of deferred payments during lockdown and financing arrangements.
Once these are factored into the cashflow, management can identify the weekly low points/requirements and consider how these can be managed internally or with stakeholder support. In the early days of the recovery, cashflow will continue to be tight and businesses will naturally be concerned regarding the strength of their customers (and also suppliers). Consequently, businesses may not be able to fund the same credit terms as before and only make sales on short credit terms or a proforma basis until confidence and headroom is restored.
Stakeholders include employees, suppliers, customers, shareholders, lenders, landlords and pension fund trustees. Post-lockdown, management will need to continue to proactively engage with these stakeholders to understand their objectives and information requirements, and build trust in case further support is required.
For example, many businesses use invoice finance provided by a variety of high street and independent lenders to provide working capital funding. Using the business plan and 13-week cash forecast, businesses will need to work closely with their lenders in the initial stages of the recovery to help deal with any funding gap that can’t be managed. In addition, invoice finance facilities typically have 90-day approval limits and, if debtors have not been paid through the lockdown, businesses may be at their funding limits when they need it most. Businesses that engage with their funding providers proactively on their plans and viability are more likely to obtain some flexibility from funders around the approval and prepayment limits to help them get through the initial weeks and months.
FRP is on hand to support you through the ongoing challenges of COVID-19. If you have any questions regarding planning for post lockdown then please do not hesitate to contact us.