Most businesses have focused on their immediate cash requirements over the last few weeks, using short term cash flow forecasts to understand the actual cash coming in and what is going out. This has then enabled businesses to look at who they can afford to pay, how much they can pay and the timing of any payments. The last few weeks have most definitely been a challenge for most, if not all, businesses.
The opportunity to furlough workers and receive a grant for their wages from the government has no doubt provided some relief, with the chancellor’s actions in terms of deferrals, payment holidays, loans and grants seemingly an attempt to limit the number of business failures during this period.
The government are set to review the lockdown measures currently in place on 16 April 2020. Whilst we do not know what will be announced at the time of writing, it is likely that the lockdown will continue for some time yet; indeed the Office for Budget Responsibility (the “OBR”) have produced a scenario to model the effects of the coronavirus pandemic on the UK, with one of its key assumptions being that the UK will be in lockdown of sorts for up to three months.
This, together with the chancellor’s earlier statements indicating that assistance will be available for a minimum of three months, suggest that the aim is for the UK to start returning to some sort of normality by the beginning of June.
We understand that the Coronavirus Job Retention Scheme portal will be opening next week, with cash to be made available soon afterwards. This will assist businesses with looking at how they meet April’s wages and give them some confidence that May’s wages will also be met, allowing business owners instead to focus on moving forward. So the question is, ‘how can you do that?’
Speak to your existing customer base
The orders that you received prior to the lockdown may now need some adjustments by your customers. Those businesses in the fast fashion supply chain have seen the major retailers taking different stances with regards to their order books, with many cancelling orders, for example. On the other hand, some customers may have realised that they will need more of a particular product in order to get back up and running again. Speaking to your customers will help you to understand what their challenges are, what their immediate/short-term needs look like and will help you to assess their ability to pay you going forwards.
Update your short term cash flow forecast
Monitoring cash receipts with a short term cash flow forecast will help you to establish the cash requirements over the next few weeks. If you have spoken to customers to ask them about paying existing invoices and placing new orders, updating the forecast will ensure that you have a more accurate picture of the cash position.
Turn work in progress into cash
Whether you are a professional services firm or a manufacturing business, reviewing your work in progress will help you to understand whether you have the ability to complete any of your existing work in progress without the need for additional purchases or input. Concentrating some of your initial efforts on this will assist you with your working capital. Where you have a number of different customers whose orders can be completed, speaking to your customer base to understand what challenges they are facing will help you to identify which invoices are more likely to be able to be paid in the short term.
Identify what additional purchases you need
Carrying out a review of your work in progress will also help you identify what purchases you need to make in order to complete your existing orders. If you have spoken to your customer base, this will also help you to identify whether you need to adjust your orders to meet your customers’ requirements. Where you have outstanding payments to suppliers, talking to them about the orders that you have received and cash flow will help you to work with your suppliers to get moving again.
Book your haulage in advance
If you use an outsourced logistics or distribution operation, make sure that you have booked your haulage in advance so that any delays in getting products out to your customers once they have been finished are minimised.
Review your supply chain
This is a good opportunity to speak to suppliers and understand what their challenges are. Building relationships with your suppliers will go a good way to helping you to move forward – if you have communicated with them with regards to your challenges, the chances are they will be more amenable to being flexible on payment terms in the short term at least.
Consider what the return to work looks like for your employees
Where you have furloughed staff, take some time to think about whether a return to work needs to be phased if social distancing rules are set to continue. If you need personal protective equipment (“PPE”) start to make enquiries as to where you will be able to source this from (given the current high demand) and think about whether you need to adjust working patterns to reflect the pipeline work. Where working patterns need to be changed, make sure you seek advice from your employment advisors.
Additional cash requirements
Many businesses are likely to need some additional help as they start back up again. Even businesses which have been going for many years will likely need to treat their business as a start-up for the next few months. Cash will be tight whilst the working capital cycle builds up again and there is likely to be some flex needed with payment terms. Starting to prepare a longer-term cash flow forecast will help you to understand what additional funding requirements you may need, and in what form.
As the chancellor announced in his speech on 14 April 2020, the Government are doing everything they can to support businesses but there are still “dark days ahead”. Taking action now will ensure that there is light sooner rather than later.
Rob Adamson, Restructuring Partner, Armstrong Watson LLP