The government’s rhetoric surrounding the COVID-19 pandemic has very much been one of battle – so perhaps it’s a good time to lean on an old Churchill quote when discussing the challenges facing business as they look to come out of hibernation post-lockdown. As the Prime Minister said to parliament following success at the Battle of El Alamein in November 1942: “This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”
Looking back on what we can now tentatively call ‘the beginning’ of the pandemic response, businesses were incredibly quick and efficient at transitioning and adapting to either remote trading or a mothballed state. Since then, trading levels have been minimal, staff have been on furlough and costs have been lowered; meaning that working capital and creditor pressures have not presented as significant a challenge as they might have.
However, this is likely to change as the lockdown eases, with increases in working capital requirements and losses funded by creditor build-up beginning to unwind. As such, it’s important that changes are made now to create more efficient appropriate business models. These models, when delivered well, will result in smaller losses, a quicker return to profitability and improved short- and medium-term viability.
The return of furloughed staff (either on a part- or full-time basis) will play a key part. From August, the level of government grants available through the Coronavirus Job Retention Scheme (CJRS) will start to reduce; returning costs to employers.
The following timeline sets out how businesses can utilise the scheme:
With the furlough scheme set to dial back and increase pressure on firms’ working capital, there are a number of steps businesses should consider. Firstly, where suitable, it will be beneficial to utilise the part-time element of the furlough scheme, which comes into effect from 1 July, to allow employees to set up the business and the supply chain ahead of reopening. This time can also be used to evaluate the size of the workforce and the overhead base, and whether these are adequate and economic for the demand that is anticipated following the lockdown. If the difficult decision is made that redundancies are required, employee consultation may be necessary while staff remain on furlough to avoid the cost of consulting upon their return.
In relation to managing creditors, firms should look to maintain an as neutral working capital position as possible by matching debtor receipts with creditor payments. It will also be important to sustain internal credit control procedures to increase debtor payments. Consider that creditors may require the payment of a portion of existing debts ahead of supplying again.
At all times, business owners and management teams should maintain a clear distinction between funding the working capital requirements of the business (through an overdraft or an invoice discounting facility) and funding its losses (loans or reserves). Keeping an eye firmly on forecasting is essential to manage the situation well. For example, a 13-week short-term cash flow model should be prepared and maintained to aid the operational and financial management of the business.
Longer-term integrated financial models (profit and loss, balance sheet and cash flow) should also be prepared, as part of a model that includes scenario planning and stress testing. These tests will include sensitising revenue and cash collections, as well as considering a second peak in the virus and a possible lockdown.
Consideration should also be given to deferred liabilities, such as rents and HMRC arrears, that are now likely to become payable in the short and medium-term.
In addition, stakeholder management should be considered in relation to operational (supply chain) and financial (working capital) matters. Negotiations should be held with key suppliers and customers to understand their individual requirements and match them with the business in order to re-open in the most efficient manner, including arranging payment plans for outstanding debts. Lenders and key shareholders should be kept abreast of the re-opening plans of the business, which will also outline whether any capital expenditure is required to meet the social distancing standards required to resume trading safely.
FRP is on hand to support businesses through the ongoing challenges of COVID-19. If you have any questions in relation to this article, please do not hesitate to contact us.