COVID-19 Return to Work – Understanding Your Financial Position

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Managing your cash flow will be vital if you are to navigate an exit from the lockdown successfully. This means that you will need to understand your cash position both prior to exit and for the immediate future. From a finance perspective, the focus should therefore be on the cash flow of the business:

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.

Use forecasts as a decision-making tool

Understanding your cash position in the short and medium-term will help you to assess what steps you will need to take in order to keep your business moving. Devising forecasts with different scenarios will help you understand what your options might be. Access your cash flow decision-making tools.

Start to look at the longer term position

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. Consider the impact of any deferred payments that you have, including VAT and tax liabilities and make sure any payment holidays and their subsequent repayments are included in the projections.

Determine whether any additional cash is required

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. 

Look at your options carefully if you need to access cash

Your existing bank or provider of finance should be the first point of contact if you need additional support. If they are unable to help then there are other sources of finance, both through accredited lenders and alternative providers in the ‘normal’ lending market. However, you should be aware that many lenders will be requesting personal guarantees even if they do not require security in the form of a debenture and incurring debt in this manner is something which requires careful consideration. We can help you secure the right finance so please get in touch if this resonates with you.

Consider the impact of any additional borrowing

Whilst additional funding may be required, caution should be exercised when opting to increase your debt obligations. When looking at borrowing money, like with the deferral position mentioned above, you also need to understand how you will repay the loan. In the event of any reduction in turnover or cash collection, will your business be able to maintain the loan repayments without needing to refinance?

Cash collection will be vital

Speaking with customers to obtain promised payment dates will help you to keep on top of cash collection. Having an effective credit control process in place will be key to making sure that debtors remain at a reasonable level. Being reasonable and showing empathy towards your customers who cannot pay the full amount is important, but your business also needs to be able to survive.

Remember that deferral is not debt forgiveness

Whilst there has been a lot of leeway with regards to payment obligations during the lockdown, any deferred payments will need to be repaid at some point. Keeping to agreed terms will be vital in maintaining creditor loyalty in case you need more flexibility later on, especially with existing supplier agreements.

Be prepared to make a loss

With the lockdown resulting in reduced turnover, this will undoubtedly have an impact on the profit margins. Many businesses will be looking at making a loss for a period. Use this period to review your fixed costs and identify any areas of the business which might have been historically underperforming and seek advice if necessary. Remember that you can only draw dividends if you have sufficient equitable reserves to do so. 

Make sure that you utilise the tax reliefs available

There are various reliefs available for business owners which can assist in tax planning. Seeking advice to ensure that your business is benefiting from the appropriate reliefs will be time well spent. Please get in touch with our Tax Team if you need some guidance.

Cash, cash, cash!

Cash is often the overlooked element in financial reporting – businesses are used to reporting about profits and losses however the old adage about cash being king has never been more important. This can also mean that many businesses don’t prepare cashflow forecasts as a general rule. Having a straightforward template is sufficient for most situations. If you need help with this, please get in touch with us.

In Summary

Being prepared will help to give your business some resilience as it looks to exit the lockdown. With the reduction in turnover, most businesses will see a cash reduction over the next few months, and mentally preparing yourself that you may make a loss for a short period will help you to deal with the position. 

However, if your forecasts show that your business is struggling, seeking advice as soon as possible will give your business the best chance of recovering from the pandemic – there will be more options available if you deal with it head on, rather than leaving it until there is a minimal amount of cash left. We have extensive experience in helping businesses to overcome these types of challenges, so please feel free to contact our team for a complimentary initial consultation if you need to chat through your situation with someone.