It is always difficult advising struggling businesses on the best way forward. My starting point is usually to assess the current financial position and then to look at the short, medium and long term prospects. I would define the short term as the next few days/weeks, the medium term as 3/6/9 months and the long term 12 months plus.

This article focuses on the short term.

Forecasting the overheads is relatively straight forward or at least it was as they are generally known and fixed to some extend. But in this current situation, you may have to question even that assumption. For example, if you operate from a number of bases, you may have to consider consolidating your operations to reduce overheads or you could negotiate with your landlord, etc.

The process of forecasting sales is often based on historical trends, seasonal variances, industry norms, and reasonable expectations – but right now all of that is out of the window. For many businesses, the income stream has just stopped.

So how do you go about looking at the short term cashflow forecast?

• Identify what the overheads are. Rent, wages, rates, utilities, IT, etc
• Can any of these be reduced – not operating may mean lower energy costs.  Rates holidays are available
• Can any of these overheads payments be deferred or holiday taken? Talk to your landlord and suppliers. For once everyone is in the same boat, there is no shame or weak negotiation position.

Look at your variable costs – if you are not operating you will likely not have to incur these costs. But be careful, you may have supply contracts that envisage minimum deliveries. Again talk to your suppliers – see what is possible.

Income?  Assume the worst and see what the numbers look like.

Prepare a cashflow forecast, ideally on a daily or weekly basis. 

Keep it simple.  At this stage it’s about identifying critical payments that need to be made and how they are going to be funded.  More robust forecasts are part of the medium and long term planning, but for now, a quick spreadsheet usually works.  This will help to pinpoint where there may be a shortage of cash to make payments.

If you have a shortfall what are your options?

In the very short term, some payments could be put on hold to allow mission-critical payments to be made, but this can be the start of a slippery slope.  Very careful cashflow management and professional advice are vital if directors are to avoid problems down the line.

There are 4 ways to improve cashflow

1. Increase income – difficult if not impossible at the moment
2. Reduce costs – negotiate with suppliers, streamline operations
3. Reduce the cashflow cycle – defer payments, speed up collections, sell slow-moving stock at discounts, invoice discounting
4. Inject more funds – either personal funds or borrowed funds

What about government help?

The government has announced a lot of help for businesses over the last few days. A useful summary is available from the ICAEW here 

There’s help for 80% of wages up to £2,500 per employee – the CoronaVirus Job Retention Scheme. This is a very useful tool and may allow you to keep people employed – the details are still emerging so keep your eye on the media.

There are rates holidays available for small businesses

VAT payments have been deferred.

There are loan guarantees available

Businesses need to be careful about what government help is on offer.

The help is in two very different forms.  Reimbursement/holidays/grants and deferments

Payment deferrals and loans sound like a good idea but they are effectively kicking the can down the road. That may be enough to keep the business afloat for now but the business will need to make profits to repay those debts. Given the uncertain outlook, it is very difficult to assume that the business will return to historic norms once the current crisis is over. For some businesses, the lost revenue will never be made up. If you are a coffee shop and have lost 3 months worth of sales because you are closed, your customers aren’t going to buy double the amount of coffee in the 3 months after you reopen to make up for it – that revenue is lost. Some businesses may see customers deferring purchases and there may be a pent up demand when business gets going again – you will need to be ready for that.

In these uncertain times, I will keep sharing my advice so check back here for more information over the coming weeks. Please bear in mind that all advice in this post and on our website is generic and you should take professional advice.  If you want specific advice please get in touch with us by email, call or click the chat button.