Over the past 18 months, Government’s ever-shifting COVID-19 restrictions and support packages have been influencing business decisions across many industry sectors. Now, as restrictions are relaxed across the UK, business leaders are aiming to take back control of their commercial destinies – but where should they start?
The pandemic has brought challenges for many businesses and some have suffered much greater hardship than others. While some were forced to close altogether for prolonged periods of time, others benefitted from an unexpected increase in demand for their goods or services. For many, the business support measures provided by the Government in the form of loans, grants and the furlough scheme, helped to protect jobs and keep them going.
With the furlough scheme soon to be phased out altogether and capital repayments already kicking in for many with Coronavirus Business Interruption Loans (CBILs) or Bounce Back Loans (BBLs), many businesses are now seeing their cash outflow increase. At the same time, some businesses have found that trading conditions have become more challenging, particularly in sectors such as construction and manufacturing, which are currently being affected by a double whammy of a lack of materials availability and skills shortages. For businesses that source goods or raw materials globally, significant supply chain disruption remains a major cause of frustration, which is continuing to erode margins, impact business performance and affect cash flow.
Those businesses that adapted successfully and adopted a positive, entrepreneurial mindset during the pandemic are more likely to find themselves in an improved market position, although revenues are unlikely to have recovered to what they once were. Achieving sustainable growth however, will remain challenging for many businesses; requiring a clear business strategy that balances long-term goals with agile, short-term decision making.
Some tips to help business owners to take back control of their commercial destinies follow:
1. Leading from the front – Strong leadership has arguably never been more critical to the performance of SMEs than it is right now. Business owners that approach their role in a positive and energetic way have been more successful at forging strong relationships with customers, suppliers and employees. As markets rebound and demand levels climb, they will be well placed to leverage these relationships and stay abreast of any short-term risk factors that could undermine their business performance in the weeks and months ahead. However, do not assume that customers and the supply chain are robust. Maintaining close communication and undertaking credit checks will help mitigate cash-flow challenges and business interruption.
2. Planning for growth – With activity levels increasing in many industries, many business owners are planning for growth. Costs are also creeping back up however, as support initiatives are withdrawn. Some cost increases are more difficult to predict than others, such as costs associated with skills or materials shortages, so there is still a need for caution. Plans must be robust and take a realistic view of demand-led resource requirements.
3. Take the workforce on the journey – Effective leadership can help businesses to retain skilled staff and recruit new talent; giving them a competitive advantage. Business owners should aim to stay close to workers and seek to understand the effect that the pandemic has had on them as individuals and collectively. It may be necessary to take advice about the introduction of a wider range of rewards, as well as flexing policies to give workers what they want. In particular hybrid working, where appropriate. A key challenge coming up could be planning for a return to the workplace and business owners will need to design their workplace policies around the sensitivities of the existing employees and new recruits.
4. Trust the numbers – To plan effectively, business owners need timely and accurate financial information based on forward-looking critical assumptions of where the business is now and where it is aiming to be in the future. As costs increase, business owners need to know if there will be sufficient cash to fund their strategic growth plan, or whether additional assistance is needed. If they fail to develop a cashflow model based on accurate three-way forecasting, they could fall into the overtrading trap as growth returns, leading to financial difficulties.
5. Stay cash-flow positive – Staying cashflow positive as the business grows is likely to be the biggest challenge for many SMEs. It is important to bear in mind that growth plans must be funded and, at the same time, financial commitments must be met on time and can’t be allowed to slip. Many businesses have already started making capital repayments on their CBILs or BBLs loans. In addition to this, some have struck an agreement with HMRC to repay a deferred tax liability. These payments must stay on track and any tax due on current earnings must also be paid in full, or the agreements they have secured could be withdrawn.
6. Complete a reality check – The pandemic has created unusual and unpredictable trading conditions for many industry sectors, so it is important to sense check the financial models used to forecast demand and business performance. For example, businesses may think that they will be able to recruit additional resource as they scale their operations, but may not have considered how the mindset and expectations of workers have changed during the pandemic. Equally, will they be able to source the materials they need to increase production, at a time when supply shortages are becoming more prevalent.
7. Review insurance cover – SMEs are aware that trading conditions in a post-pandemic and post-Brexit world carry greater risk of disruption. Business owners shouldn’t assume that a customer or the supply chain are as robust as they once were. It makes sense to review insurance cover now to consider whether it is sufficient for the future, taking into account how the world has changed and the company’s strategic growth plan.
Mark Perrin is an advisory partner at accountancy firm, Menzies LLP. He specialises in supporting SMEs with improving financial performance, reducing financial risk and optimising their cash position.