23 Mar 2020

Understandably almost every newspaper article, television program, email and post on social media is in some way connected to the public health issue of COVID-19 at the moment.

It is impossible for people to determine precisely what the financial implications of this are for the economy or how long they will last, not least because we do not yet have a clear understanding of when the instances of infection will peak and how quickly it will tail off thereafter. Clearly, the ramifications will be different for each business and each individual and so you should be taking advice from your trusted advisers.

My personal view is that, with the election out of the way and Brexit confirmed with transition underway, the UK economy was set to perform well in 2020. None of the underlying fundamentals have changed but the imposed social distancing and very recently mandated closure of restaurants, cafes, public houses, bars, nightclubs, gyms, leisure centres, theatres and other businesses has and will continue to result in the hospitality, entertainment and any other industry that requires physical interaction, being severely affecting in the short-term. This inevitably has knock-on consequences for supply chains and that, coupled with a complete loss of financial confidence in the market results in liquidity drying up and businesses that could otherwise more readily work remotely being significantly impacted too. There is therefore virtually no business or individual that will be unaffected in the coming months.

I believe that the key to surviving and thriving (ignoring taking the necessary health precautions which is taken as read) is to cut through the noise and remain focused on what is important. I find it unlikely that we will not move into the ‘tail off’ phase in the next three to six months and I believe that supply chains and working practices will have largely returned to normal within nine months.

I therefore see this as a significant but short-term problem, which given the recent measures announced by government, also appears to be their view – indeed Boris Johnson has openly said that he expects the worst of the medical issues to be behind us within 3 months. Businesses and individuals should therefore cut their cloth accordingly. This is about financially surviving this difficult period and being in a position to exploit the rebound opportunity that will inevitably materialise. To do this, cash is king (even if profits are impacted for a period) and so SME’s should return to the basics as follows;

• Strive to have as much cash in the bank as possible to cover overheads.
• The ratio of short-term assets (cash, amounts due and stock etc) to short term liabilities (trade payables, VAT and PAYE owed to HMRC etc) should be as high as possible (I would suggest an absolute minimum of 2:1).
• Review all expenditure items to ensure that value is being received – this doesn’t mean cut expenses regardless of impact, particularly when it comes to staff. It is even more important during these times that your business is the best that it can be, but there is no place for superfluous expenditure.   
• Carefully review envisaged capital expenditure (expenditure on expensive assets). There may be a means of leasing or hiring the item or deferring it entirely, instead retaining the cash in the business.
• Prepare a cash flow forecast and stress test this using various assumptions so that you have a clear understanding of the cash position.
• Have a plan B. I’m a big believer that a business cannot rely on one plan, particularly when in unchartered territory such as we are today. Understand what funding options are available to your business, both debt and equity and explore what would be required to obtain them. The government have announced various interventions which should be fully explored (more on this below).
• Check existing insurance policies to determine whether business interruption cover is included in existing policies.