Working Capital pressures on Recovery from COVID-19

Working Capital pressures on Recovery from COVID-19

Historically more businesses fail on the way out of a recession than during a recession, due to working capital issues. We may not be in a recession but coming out of lockdown will have the same financial consequences as businesses start up again or enter a rapid growth stage.

At a very basic level, think about how quickly you pay your staff and suppliers, compared to how quickly you get paid by your customers and clients.   Depending on the sector you may deliver a product/service at the end of August, pay your staff in August, suppliers in September and may not get paid until October.    Repeat this a few times and your cash flow pressures quickly start mounting.

With lockdown being eased and businesses slowly trying to find their new norm, now is the time to plan and forecast your own recovery out of lockdown and see how you might be affected by working capital constraints.

Types of cash flow pressures

Customers may reduce trade/order volumes and may not pay as promptly if at all, and it then become a bad debt.   If you wish to pursue the bad debt it might lead to costly litigation which may not actually achieve the cash flow input you require, especially if liquidation is likely.     If you find yourself in this situation then it is worth speaking to our insolvency team as they may be able to assist in recovery.

Credit ratings may be affected due to slower payments to suppliers or additional debt exposure, which will affect credit limits and more requests for payments in advance or pro-forma invoice payments may be demanded.

Deferred tax payments and new borrowings (business interruption loans) may have been received to assist you through the lockdown pressure, with additional pressure as these debts fall due for repayment.

Potential supply issues due to regional lockdowns in areas where your goods are manufactured, may mean you need to build up your stock levels, meaning longer supply cycle and further pressure on cash.

Your credit facilities might be at capacity, so limited further funding headroom.

With markets very volatile currently, foreign exchange risk for internationally sourcing or supplying companies could be very high and put your business at risk.

Your current bank covenants may be breached in the coming months (if not already), so best to have your plans ready for the banks and keep them informed before they come knocking at your door, and obtain clarity from your providers on their expectations, keeping a dialogue open with them.

If you have a seasonal trend to your income, have you missed the profits/cash from your peak period so when you hit your lean period will the impact be worse than in other years.

Other pressures from an Operational perspective

Staff may be currently on furlough, but as trade returns, are you able to fulfil customer commitments and deliver customer care – timing their return will be critical to success.

Workforce changes will be required and will be best to follow Health and Safety directives to protect your staff and your business. You will need to consider          :

  • Are your staff able to return; do they have dependants that are still at home as they have not returned to school;
  • Do you have measures in place to protect staff should someone fall ill with COVID-19, for example, working in team bubbles, so if a member of a bubble falls ill, then a second bubble that was working from home can swap in.

What to do next

You need to understand your minimum cash requirements by establishing a short-term (12 week) rolling weekly cash flow forecast with what-if-scenarios.

You will also need to prepare longer term forecasts, with varying assumptions, especially to factor in the VAT deferred payments that you might have taken advantage of and will fall due in March 2021, along with personal tax payments, if applicable, and map out the repayment of Bounce Back or Coronavirus Business Interruption Loans.

Bolster credit and collection capability – Chase debtors targeting larger balances first, consider early payment discounts where you have funding pinch points.  Also ensure that your exposure is monitored, consider trade insurance.

Control outward payments (stop unessential cost/capital expenditure, delay payments to terms or requested extensions and insert commission/bonus freezes).

Stock intensive businesses need to become leaner and closer to Just-In-Time service (but mindful of lead-times and a potential second spike).   We are aware it is taking longer for goods to be dispatched, as suppliers are unable to process the same volumes due to social distancing requirements.

Look at financing requirements (Invoice Discounting, Asset/Trade finance where capacity exists), which we can advise on, either with your existing bank or through the Capitalise platform which has access to over 400 lenders.

You need to be considering the points above now so that you are ready for the easing of lockdown that we are now entering, for many businesses the first quarter of 2021 will be difficult for cashflow purposes.

We can assist you through this process, but you need to be thinking now about the pressures that will be ahead.   Please contact us if you need advice on Working Capital pressures on Recovery from COVID-19.

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Working Capital pressures on Recovery from COVID-19

Working Capital pressures on Recovery from COVID-19