This is a Guide to cash management for SMEs during these uncertain times.
In these unprecedented times, the impacts of the COVID-19 pandemic has businesses of all sizes grappling with huge uncertainties. Governments around the world are effectively imposing lockdowns on their economies to stem the transmission of COVID-19, and with this they are announcing stimulus packages to try to shore up confidence in order to limit economic damage as far as possible. The economic consequences will be dire whatever the governments do and which, with certainly, is unlikely to be enough for many SMEs and particularly startups.
Whilst it is difficult to predict how things will unfold from here, preparing for the worst and hoping for the best is currently as good a mantra as any. This guide aims to provide some direction to SME businesses, particularly those leading smaller and earlier stage TMT businesses. The focus is on actions aimed at maximising the cash position of the business to ensure it has as long of a cash runway as possible given the inevitable challenging trading environment to come.
Determine available cash runway and forecast cashflows
Determine the cash runway by dividing the current cash balance by the monthly burn rate. In the current environment revenue is likely to fall much faster than costs and so the available cash runway should serve to provide a sense of urgency with which action should be taken. Quick and decisive action may be needed.
This situation is likely to last much longer than anticipated so you need 3, 6 and 12 month contingency plans at the least.
Any cashflow forecasting that may have been conducted needs to be revisited and any sales, spending and growth assumptions need to be very carefully reconsidered in the context of a very different trading environment. Conduct sensitivity analysis on cashflows considering a range of scenarios.
Revisit cashflow forecasts regularly, even daily if required, to update with new information. Keeping on top of this will enable effective forward planning.
Fixed Overheads
If you have business premises and receive either Small Business Rate Relief or Rural Rate Relief you may be eligible for small business grant funding of £10,000 or more, in addition there is a business rates holiday for all retail, hospitality, leisure and nursery businesses in England, Scotland and Wales based businesses should check their status on the relevant websites.
You need to make sure that you are registered with your Local Authority, if you are not sure get in touch with them and make sure you have a copy of your rental agreement at hand so you can provide them the details. Do this immediately since these grants will be being paid from early April 2020.
If you are having trouble meeting your rent payments, speak to your landlord as soon as possible to discuss either deferring your rent completely for a period of time or reducing your rent payment especially if your business can’t use the premises because of social distancing. The government has declared a moratorium on any evictions during the time so don’t be afraid of having this discussion, but don’t not pay your rent without having it.
Staff costs
This is one of the most difficult costs to consider, but an extremely important one as it makes up a significant proportion of costs of most businesses.
The government has recently announced the Job Retention Scheme, in which HMRC will reimburse 80% of furloughed workers’ wage costs up to £2500 per month. This support mechanism, however, is not open to businesses whose workers are able to work remotely without interruption and so is unlikely to be of any help to earlier stage businesses in the tech industry, for example. However, it will apply to any other service industry which has been closed due to Coronavirus, eg non-essential shops.
Sales
Assume sales will take a hit and sales cycles will increase. Consider what can be done to ensure existing customers are retained; can discounts, for example, help close or extend contracts?
Consider creditworthiness of customers and their ability to pay; in this environment, all customers and suppliers will be feeling the effects and so it is in any business’ interest to keep an eye out on which customers in its sales book are creditworthy and are in a better position to weather the storm. For customers where creditworthiness might pose a risk, consider if future sales need a deposit or cash upfront to hedge risks.
Discretionary costs
Costs such as marketing, travel spend, software subscriptions for furloughed workers etc should be reconsidered and reduced or eliminated where possible.
Debtors
It is vital that every effort is made to collect cash from debtors. Consider what can be done to avoid bad debts. Consider discounts on a case by case basis, which may help with cash collection in a timely manner.
Suppliers
Scrutinise all suppliers and determine if there are any non-essential costs which can be eliminated. For those essential suppliers, explore if mutually beneficial terms can be negotiated. Perhaps the prospect of an increase in price in the future or a longer-term contract will enable suppliers to be flexible in the short term.
Inventory
Where relevant, consider turning any inventory into cash if appropriate.
Business model
Consider how your product can benefit from current market conditions. Is there an opportunity to pivot product or business model? If you are a coffee shop can you deliver? Being agile can help increase the chances of winning new customers and may help keep existing customers.
Tax
Consider using HMRC’s Time to Pay service to negotiate an agreement that will alleviate the immediate burden of paying any tax liabilities that may be due imminently.
The HMRC have already announced they will be deferring VAT payments that fall due between March and June this year.
Debt Funding
The government has also introduced the Coronavirus Business Interruption Loan Scheme, aimed at providing businesses with low interest rate loan facilities up to £5,000,000 over terms of 3 months to 10 years. The scheme is being administered by the British Business Bank.
The eligibility criteria for this scheme (‘a borrowing proposal which, were it not for the current pandemic, would be considered viable by the lender, and for which the lender believes the provision of finance will enable the business to trade out of any short-to-medium term difficulty’) means that businesses will need to check with accredited lenders to determine if they are eligible to access these facilities.
At 4 Oceans we are offering a free consultation with one of our advisors to find out if you may be eligible for a CBIL or another facility but unfortunately, the CBIL Scheme is unlikely to be helpful for early stage or start up businesses who don’t have sufficient trading history or assets against which to secure the debt.
If you are a startup or a business less than a 2years old you may be eligible for the Governments Startup Loans Scheme for a loan of up to £25,000, further details can be found at www.startuploans.co.uk .
In every case you should speak to your existing bank as soon as possible to see what short term support is available to you but for businesses that do have debt facilities in place already, you should be vigilant of any potential breaches of covenants.
You may also want to consider, where appropriate:
- Restructuring these facilities
- Extending overdrafts
- Negotiating repayment holidays
Equity Funding
Consider whether existing investors will be willing to provide capital injections to support the business. The reality is that the fundraising environment has changed almost overnight. The positive element of this change is that every investor will be focussing on supporting existing portfolios.
The flipside is that these same investors are unlikely to be acting on new deals, at least in the immediate future. When the market does open up, and it will, investors will almost certainly be redefining their valuation expectations in line with changes in the broader markets.
Angel and high net worth investors may continue to be active, especially if they are in a position to structure investments in a tax efficient manner (S/EIS in the UK).
So, communicate with your existing shareholders. It is in their interest to help you get through this period.
Seek Advice
Where you have an existing network of advisors eg accountant, solicitor, mentor etc call on them for advice, it’s likely that they have been through something similar in their business life already and in our experience they will be more than happy to talk to you.
Credits:
With thanks to Zafar Kanani of Forbury Investment Network where much of this guide originated.
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