The COVID-19 pandemic will in all likelihood change the way that we do business for a long time to come. For most businesses’ turnover is down and owners are having to turn their attention to dealing with an environment that is constantly changing during this time of uncertainty, their inventory requirements (especially those who are reliant on imports) and their staffing capacity. Maintaining profitability, or in some cases viability and liquidity, could prove to be challenging. We have provided a brief overview of some key elements you should keep in mind to help facilitate your businesses likelihood of success.
Short-Term Cash flow Forecast
Prepare a 13-week cash flow forecast. This is often an eye-opening exercise and will effectively capture most entities' business cycles. The forecast will help navigate stormy waters in the near-term, as it will highlight shortfalls in necessary cash balances. Maintaining an up to date forecast will allow you to easily identify if and when there is an upcoming risk of the business running out of cash and/or will show if borrowing requirements fall short of actual availability from lines of credit. You will need to ensure that any forecast is subject to regular revisions in light of COVID-19 and the ongoing impact it will have on the market. Cash flow forecasting is a necessary tool for distressed businesses and can be helpful for entities going through a rough patch or for stronger businesses struggling in this economy. Regular and frank communications with your bank manager is essential whether the news is positive or negative as this can help facilitate faster results when assistance may be requested from them. Being in a position to be able to identify when cash may be short, puts you on the front foot for being able to make arrangements to source more capital or to organise payment arrangements i.e. contact with your bank for extended loan facilities, contact with Inland Revenue to arrange payment plans, reviewing and opening conversations regarding your supplier arrangements and liaise with landlords to determine whether a rent relief period is feasible.
Monitor actual against your forecast
Cash is King!
It is possible that a business can still be reporting profits but have trouble meeting its current obligations to both lenders and key creditors. Having accurate monthly financial statements could prove invaluable in keeping on top of where your cash flow is at in real time and provides you with the information to compare actual results to budget. It is this tool that can enable you to fully utilise a short term cash flow to its full capacity. It allows you to identify problems that may develop as customers become slower to pay or, in some instances, don't pay at all. Some problems may not be immediately recognised and could include changes in product/service demands, increasing overhead costs, use of obsolete pricing methods or increasing competition due to industry adaptation. Where possible review all non-essential expenses and capital projects to identify opportunities to free up cash surpluses quickly if needed. Identify whether there are any commitments that can be put on hold or adjusted given the current environment. Consideration of amended optimum inventory levels cannot be underestimated as pre Covid optimum may be quite different to post Covid optimum and these changes may have the desired result of freeing up working capital. Finally, ensure your customers clearly understand your payment terms which must be targeted at minimising credit terms.
Adaptive management – learning by doing
When faced with great uncertainty, we have three options:- remove the uncertainty and proceed, proceed anyway and adjust as necessary, or do nothing. If we assume that option 1 is unrealistic, and option 3 is unacceptable, we’re left with only one option – take action, learn, and adapt. The very objective of adaptive management is to provide a framework that drives action now, despite uncertainty. The goal is not necessarily a predetermined target – at least not initially - it’s achieving incremental change. The idea is to take a small step, reflect, learn, adjust, and take another small step instead of large strides that may well lead you off course when dealing with moving targets.
Adaptation goes past simply responding to disruptive events; it also means seeking out and seizing opportunities that are created by market forces.
At times like this, it’s this sort of iterative decision making that should be the foundation of your strategic planning.
Short-term action plan
The potential output of a short term action plan should be a succinct, “fit-for-purpose” plan that prioritises the what, who and when for your organisation and can be used as a roadmap for the upcoming months. It can also be used as a key discussion document for sharing with your business’ stakeholders.
The following areas should be noted within your action short term action plan:
- Ensure you understand the current Government rules and requirements for your business
- What can I be doing now to prepare? What do I know for certain?
- Determine short term goals
- SWOT analysis
- Overall solvency
- Working capital needs
- Operational – Supply chain continuity, logistics
- Customers and sales
- HR, Employment issues and structure of the business
- Finance and funding – what Information would be required to get funding (cashflows, plans etc)
Ideally a short term action plan should focus on a 90 day time period that lends itself to becoming the basis for a reviewed annual plan. It is important that you not only focus on the threats and weaknesses of the current market, but also identify any opportunities to reinvent, grow or diversify your current business offerings and operating style. While you may not be in the right place financially to take advantage of these opportunities currently, they could possibly be worked in to your long term action plan or revisited at a later date when your business planning moves from recovery focussed to growth orientated.
While the above tools completed successfully will help to ensure your business is well placed to deal with and adapt to this uncertain operating landscape, it is paramount that the planning put in place is robust and thorough as well as brutally honest – there is no room for rose coloured glasses here! It is also important to remember that your business is there to serve you not for you to serve it – being aware of what you need to get out of the business will provide direction and guidance for your forward momentum – remember; Step, Reflect, Learn, Adjust!