Putting business survival first
Much support from government is centred around businesses taking on additional debt to get through the crisis. We don’t think that should be the first option . . .
The current economic crisis
Unless you are a supermarket or a pharmaceutical company the likelihood is that your market will have been severely affected. The business you run has just had to endure what was a very challenging 2019 as a result of the Brexit and subsequent election uncertainties. With these issues having been resolved in December many of us were hoping for a post-election bounce in 2020. The economy did its best in January and February to get going. Just as we were expecting a new wave of growth – BANG the Coronavirus hit us in a way none of us could have predicted.
How bad is the global economy?
Severely impacting the global economy, this virus knows no geographical boundary when it comes to hitting trade.
Recent Purchasing Managers’ Index data published by IHS Markit and the Chartered Institute of Procurement and Supply (CIPS) show that manufacturing and services sectors in key geographical areas, including the UK, US and the eurozone, saw record falls in activity during March. The UK figure dropped from 53.0 in February to 36.0 in March. Readings below 50 indicates contraction.
In our experience every economic shock seems worse than the last. However, we really do think this is a big one with the shockwaves reverberating throughout the world and with no end in sight – nothing and nobody is being spared.
In saying this the surest thing is that we will return to some form of normality at some stage, after all every government in the world wants the same thing, and we believe that, we in the SME sector, should make preparations now for business on the other side. Whatever and whenever that is.
In seeking to deal with this major shock one of the big questions is:
Should my business take on more debt?
Simply taking on more debt to plug trading and/or operational problems within the business is not the answer and could leave you with more problems at the point we are coming out of the coronavirus lockdown.
By all means, it is logical to look at increasing debt to facilitate growth. However, we are not in ‘normal market conditions’ and whilst business is declining, this is a high risk strategy when the end of this challenge is not clear. How long can you sustain the cost of this investment? What will happen to your business when the climate starts to improve? There is a strong chance that you will be left with a weakened business, in a reduced market with increased debt servicing costs.
This cannot make sense, and in our opinion, additional finance should only be considered when all other options have been investigated.
In any case, unless the business is in absolutely ‘pristine’ order it is going to be very difficult to secure the finance from the banks. Certainly, with good terms and in the next couple of weeks when you really need it! Recent estimates suggest that only approximately 1% of applications had been approved.
What should I do to protect my business?
We believe businesses should be both developing short term plans to stabilise and protect their businesses, and also a medium term strategy readying themselves for the return of markets, as below:
Stage 1 of business survival
Creating a 90 day survival plan including cash flow forecast(s)
Stage 2 of business survival
Analysing the existing offering and developing a flexible strategy to take advantage of opportunities as markets gradually return
The key tenet of both stages should be to create as much flexibility within the organisations cost base and workforce
What are the survival options for my business?
The surest thing is that it will be different in the new world, post virus. The key business attribute will be the ability to react to new market demand quickly and efficiently.
Businesses can plan for this and develop new internal structures that enable the speedy responses that will be needed when we all come out the other side.
John Thompson, our Business Advisory and Turnaround Partner, has both run his own business and advised other SME organisations on creating and implementing turnaround plans. Having successfully navigated though 3 major economic shocks. John’s turnaround and growth expertise positions him to support business owners who are experiencing issues preventing them from realising their true potential.
If you would like to talk through some ideas and options for your business, complete the form and John will be in touch.