How businesses affected by Covid can get on top of a cash flow crisis

All business owners understand the importance of the ‘Micawber Principle’ from Charles Dickens’ David Copperfield.

‘Annual income 20 pounds, annual expenditure 19 [pounds] 19 [shillings] and six [pence], result happiness. Annual income 20 pounds, annual expenditure 20 pounds ought and six, result misery,’ explains the tragicomic but eternally optimistic clerk, Wilkins Micawber, who never quite managed to live within his means.

In other words, don’t spend more than you earn.

But we are in the middle of a pandemic, and many small businesses are finding that having enough money to pay the bills is a matter of luck, rather than of judgement.

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Even if you’ve made sensible decisions, consulted the experts and put away money for a rainy day, you’re unlikely to have planned for the tsunami that is 2020, with its on/off business closures, complicated loan schemes and radically shifting customer behaviour.

So, if the bills are stacking up, and the money isn’t flowing in, what are businesses to do?

The most important thing is to ensure you do not get to a crisis point. ‘Standing still and hoping for the best is not a plan,’ warns Simon Michaels, CEO of HW Fisher Business Solutions.

‘During this time, it is critical that you are in a position to react to the changing economy very quickly and this means you need your business to be as flexible in the short term as possible to ensure you can get through the next few weeks and days.’

Cash flow is simply a description of how much money is being transferred in and out of a business.

Cash comes in from people buying your products and services, and goes out because you have to pay rent, pay your suppliers and pay your employees.

The problem that many firms are finding at the moment, though, is that although many of their outgoings remain the same, their customers are either not able to come, or are not attending in the same numbers as before, so the cash coming in is not enough to cover what is going out.

Michelle Ovens, head of Small Business Britain, says that managing cash flow is a massive issue for businesses at present.

‘Small firms need to be very focused on cash flow during the current uncertainty,’ she says. ‘It’s certainly time to make use of everything you have available to manage cash flow.’

Businesses that simply run out of cash and are unable to pay their rent, staff or suppliers will find it exceptionally hard to get back on their feet, so it is important to act as quickly as possible to avoid that situation.

We’ve talked to the experts to pull together a step-by-step guide for all SMEs trying to make a little go a very long way.

Work out what you have

Even if you aren’t immediately worried about running out of cash, a cash-flow forecast is an important thing to have, and if you’re nearer to the edge it is vital.

This simply looks at the trends of what has been going out and coming in, so you can see whether it adds up.

‘Try not to panic,’ advises accountant Mahmood Reza, who runs accountancy firm Proactive Resolutions in Leicester. Even if the numbers are hard to swallow, he says getting them on paper ‘can give you peace of mind because it will help give you options and you will make better decisions’.

Using accounting software such as Xero or employing a professional accountant may help you to get a handle on the figures, but even just going through your bank statements is a good start.

‘A rough draft is better than nothing. This is not about predicting the future, your cash story reflects your business story,’ Mahmood says.

‘Numbers are your best business friend; they won’t lie to you. You need your friends in the bad times, as well as the good.’

Deal with late payments

Late payments are a perennial problem for small businesses, and can have a serious effect on cash flow. Figures show that the average SME is owed £25,000 in late payments, which can have a sizeable impact on their ability to function.

Getting customers to pay up on time is no joke. Donna Torres, from Xero, says that the amount businesses are owed ‘compounds issues, especially when businesses are dealing with rent hikes, increases to business rates and the race to keep up with evolving digital economies’.

Mahmood, at Proactive, says that now is the time to look at your payment terms, and also to contact those who have not paid up.

‘Don’t adopt the ostrich look,’ he says. ‘You may not feel comfortable doing it but keep on top of late payments and chase. Send reminder invoices promptly and follow up with a phone call if needed.’

He says that changing your credit control policy – giving fewer days to pay or even asking for some payment up front, could help you to control cash flow. ‘Payment terms can be up front, on delivery, or several days from invoice.’

Brendan Johnson, from Champ Consultants, also recommends managing your payment terms and reviewing the customers your are taking on board.

If they are larger businesses you can check how long it takes them, to pay their invoices at gov.uk/check-when-businesses-pay-invoices.

He also suggests offering incentives for early payment to keep cash rolling in. ‘With cash certainly being ‘king’, consider offering early payment discounts or arranging an invoice discounting facility to bring that cash in earlier.’

Invoice discounting allows you to get cash from your invoices before they are paid, and can save you in a credit crunch.

Cut all the costs you can

With your ability to trade uncertain, now is not the time to speculate to accumulate – instead you should trim costs to the bone.

‘Planning for the long term is always recommended but, in order to survive the current unpredictable and fast-moving market, the short-term needs of the business must be a priority right now,’ says Simon from HW Fisher.

He recommends that businesses that are struggling consider outsourcing services such as back office support to cut ongoing costs, and even considering serviced offices so they aren’t saddled with a long-term liability.

If you can defer a payment, you should, he believes. This includes speaking to HMRC about PAYE and VAT, as well as approaching landlords and other creditors to ask for more time. ‘Surplus cash is no longer a luxury, it’s a survival tool.’

Get help for small businesses if you need it

While some schemes to help businesses through the pandemic are winding down at the end of October, there are still many initiatives available to help those who are struggling with restrictions.

Larger loans, called CBILS (Coronavirus Business Interruption Loans Scheme), offer between £50,000 and £5million, while smaller Bounce Back Loans offer sums from £2,000 to £30,000.

For the first year the loans are interest free and this interest is covered by the government. Loans were initially repayable over six years and this has now been extended to ten.

Businesses that are forced to close through Tier 3 lockdowns may be eligible for extra payments through the local authority.

To be eligible, a business must have been required to close due to local COVID-19 restrictions. The largest businesses will receive £1,500 every three weeks they are required to close, while smaller businesses will receive £1,000.

The payments are triggered by a national decision to close businesses in a high incidence area.

‘There are lots of new things open to small firms. The Chancellor’s recent announcements mean businesses can push back some Bounce Back Loan repayments, as well as spreading out tax payments,’ says Michelle, at Small Business Britain. ‘There is also a new loan scheme being announced in January.’

All of these schemes could help to tide you over until better times.

Case Study: Hair salon owner Dennie Smith

Dennie Smith runs a hair salon and a dating site, in Caterham, Surrey.

Since the advent of Covid-19 she has done everything she can to deal with cash flow issues, even once her hairdressing business had reopened.

‘I paused the refuse collection, paused the magazine subscription, found cheaper utilities suppliers and sadly let two part-time staff go,’ she says.

She has also closed the salon on Mondays to save on wages and heating.
Like all other hairdressers, Dennie’s costs have risen because of the requirement to use PPE, but she feels she cannot increase her prices very far, putting them up by just £1.

Dennie Smith is scared for the future of her hairdressing business

‘I’ve introduced VIP cards and a whole offer page including 30 per cent off for key workers to entice people in, as it is worryingly quiet.’

She has also cut down on costs for her dating site, stopping paying people to write blogs, and cut down on Facebook advertising, but still feels in both cases that this may not be enough.

‘Last October in the salon we took over £16,000, and we will be lucky if we take £8,000 this year,’ she says. ‘I am very worried and nervous.’

Don’t suffer in silence

Finally, if you feel you’ve reached the end of your options, it is worth talking to everyone involved, whether it’s a landlord who could defer a payment, or a bank that may offer an emergency overdraft.

‘Remember you aren’t in this alone,’ says Mahmood. ‘Talking to your accountant or business adviser about the best way to manage cash flow can help you to build a better business.’

With the pandemic putting so many businesses in a perilous situation, it really is important to take all of the help you need to keep the cash flowing.

Ask for support

‘Most businesses are experts in what they do, but not necessarily finance, so if you’re struggling, get some help,’ advises Michelle Ovens at Small Business Britain.

‘There is lots of support out there, such as the Small Business Leadership Programme, run by business schools belonging to the Small Business Charter, to help small firms manage their businesses better.

This is free and online so you can get started right now from home.’

Set your goals

‘Having a cash flow forecast without goals in mind is more or less pointless as you can’t tell if you are on track,’ says Rebecca Freeman, who runs Lagom Finance. ‘The direction is more important than the speed.’

Get AI to help you

The rise of Artificial Intelligence (AI) should not be discounted when thinking about business planning.

Apps like Fluidly, using this technology, can help you to work out how much money you have available and can optimise cash flow, says Donna Torres, from Xero.

Rebecca, at Lagom, recommends Float, which she uses with her clients. ‘There are many tools out there which utilise clever functionality and machine learning to predict your future growth,’ she says.

That said, she does go on to warn that they are only as good as the data you put into them.

‘They can never replace the insights you have as a business owner. The sales pipeline you’re building and that one-off payment you need to make to your landlord in six months’ time – no amount of machine learning can predict that, so the better the quality of the data you feed whichever tool you use the better.’

If you’d like to anonymously share how you spend and save – and get some expert advice on how to sort out your finances – get in touch by emailing [email protected].

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