Planning for the new beginning…

It is clear that the Covid-19 pandemic has posed an economic and social challenge to the worldwide population, the only cure (Sweden’s view aside) being to revert to medieval style containment measures that drive right to the heart of our modern world. Looking at this from an economic perspective only, the impact on the UK economy and infrastructure will leave a lasting impression, BUT the question now is – how do businesses trade out of the lockdown, with a largely furloughed workforce, a stretched working capital cycle and no end in immediate sight?

In short, how do businesses plan for the new beginning? 

Business owners should take this opportunity to review their core strategic business plans surmising how the post Covid-19 world will require products or services, model various scenarios to understand how this will manifest itself, and in essence, prepare for the worst and hope for the best.

There are numerous repositories of information and advice on what business owners should be doing – most of which concentrate on high level plans. The focus of this article is to get to the heart of the matter and remember ‘Cash is King’ – particularly so for the next 12 months.

In general, Government support for businesses to date has been extensive, and it is becoming easier to access (on the whole) as funders get to grips with the various funding strands and how to apply this to the relevant business situation. Access to funding support (and therefore cash) right now is less concerning than a few weeks ago, but still carries a timeline of uncertainty as everyone is forecasting and estimating an end to the Covid-19 Government actions – an unknown at the current time. 

Looking to the future, the key risks to be considered are now three-fold, all of which are connected:

  1. Covid-19 restrictions go on for longer than you expect;
  2. Working capital stretch as economic activity increases; and
  3. Business failures in supply chains, but more importantly in customers, resulting in bad debts

If we focus on the working capital stretch, as this is something that can be foreseen and therefore planned for. My particular concern here is with businesses utilising working capital style funding lines (e.g. Invoice Discounting). Using Invoice Discounting as an example, the key security for the funder is the customer debt itself. With the current Covid-19 restrictions, we are seeing the following:

  • Customers taking longer to pay, meaning suppliers are waiting longer to get paid (working capital stretch);
  • Invoice Discounting providers are working with their clients by extending the funding period (e.g. 120 days rather than 90 days) such that older debts remain funded.

The above funder response is undoubtedly a positive response to the working capital stretch. However, as time progresses, it may be that some debtors fall outside of the new extended funding period, and credit reference agencies review the credit ratings of certain businesses, potentially restricting access to Invoice Discounting cash advances due to credit concerns or concentration limits. If we also assume that economic activity now begins to accelerate and the business in question now starts to re-open mothballed factories and commence manufacturing products again, we could envisage the following:

  • Suppliers will want payment before releasing new raw materials;
  • Wages will need to be paid for employees now not furloughed;
  • Other manufacturing costs will need to be paid on shorter credit terms than may have historically been enjoyed; and
  • Customers may be more reticent to settle invoices quickly or may be in financial difficulty and fail.

The above is a perfect storm as the working capital cycle expands beyond historic levels and the Invoice Discounting provider is already at the limit of their new extended and revised credit policy.

There are a number of actions that business owners can take to mitigate the above, and indeed access to other sources of funding are certainly currently available in most cases for viable businesses. 

The key takeaway from this article is to ‘plan for the new beginning’ and factor in potential ‘shocks’ to the business via modelling various scenarios. Some funders may not formally request a financial model for the future in assessing the business’ viability for CBILS (or other funding sources), but business owners need to understand the funding that they will require for the next 12 months and beyond, together with the key assumptions that underpin the estimated funding requirement. Keep these assumptions under constant review as they will change, and maintain an open dialogue with funding partners.

It is also important to note that those businesses doing well during this pandemic, shouldn’t think they are immune to the financial risks and working capital issues noted above, and therefore should still plan appropriately. As history proves, businesses can still unfortunately fail on the way out of recession, and so it is essential that all business owners look to plan for the new beginning.

We are here to support businesses and assist in helping business owners understand the key assumptions and working capital drivers applicable to them, not just for the purposes of fundraising, but also to enable them to plan for a post Covid-19 world, and capitalise on the opportunities that they will encounter.

Andrew Feeke

Corporate Finance Partner

andrew.feeke@mooreandsmalley.co.uk

0161 519 5050