COVID-19 – The global start-up and the inevitable scramble for liquidity
There is no doubt that business owners and directors are in panic mode. This is totally understandable as this type of crisis is unprecedented – there is no tried and tested toolbox of previous experience on which to rely. There are so many questions right now and, honestly, as advisers we are often no better informed.
However, we will get through this and we must use this time wisely to make sure we make informed strategic decisions out the other side. What is certain is that it’s very much a level playing field post COVID-19 and we must all plan for life as a ‘start-up’ regardless of how many years a business has been in existence.
So what does life as a ‘start-up’ look like, what funding is required, where is that funding coming from, why is liquidity key and why is ‘wait and see’ not an option?
Strategies for life post – COVID-19:
- Build an integrated financial model – Key business decisions are often made on ‘hunches’, ‘gut feels’, ‘split second opportunities’ and some of the very best businesses have been founded on those decisions. However, in uncertain times, good business decisions must be made on an objective, rational basis and fundamentally, upon sound financial reasoning. For too long, recovery has been based on ‘gut feels’, but with multiple stakeholders involved in recovery, the objective of getting all stakeholders to the same ‘feeling’ is often unachievable. Yes, financial models are based on assumptions but if the assumptions are fair and honest then the numbers don’t lie.
- Stress test your P&L and liquidity – It’s imperative to run sensitivities against your financial model. This might be uncomfortable but you need to know your boundaries for failure and survival. Understand the pinch points and get ready to manage them. You will be surprised how far your historic relationships with customers and suppliers will get you – they often need you as much as you need them!
- Look after your staff – Fear and panic are debilitating to both business owners and employees and that’s understandable as each have their own worries and personal circumstances to consider but both need each other. Strong leadership and emotional intelligence at this time will drive loyalty and commitment from staff long after COVID-19 has left us.
- Prepare to succeed – Plan for changes in consumer behaviour and identify new world opportunities.
- Right size your business – Your business does not need to look the same post COVID-19 as it did pre. It can get back to its original position in time but that does not need to be immediate. I will anger some by saying this but ‘pride and ego’ is not an option right now.
- Customers – Review your customer segments for liquidity and repayment risk. Yes repairing revenue streams will be important but not at all costs. There will inevitably be failures in the new business environment.
- Suppliers – Consider de-risking and shortening the supply chain. Your supply chain may be in a location that continues with COVID-19 restrictions when you do not. Use this time to communicate with key suppliers or new potential suppliers to understand their challenges, timescales, credit issues, shipping issues etc.
- Funding partners – Whether they be debt or equity, communication and support is key. It is a challenging time for all parties given the uncertainty but clear communication of a well thought out financial plan highlighting the impact of COVID-19; the steps taken to date; and the rebuild plan post COVID-19 is the only way to navigate funding structures.
Life as a ‘start-up’ – CBILS, liquidity and other forms of funding
Bank and lenders are currently dealing with a colossal number of requests for moratoriums, CBILS support and any other form of support available. The general feedback from all lenders is that they desperately want to help but despite an 80% guarantee from the government, CBILS still have a number of key criteria that must be met and the lending decision must still make commercial sense. Add to this the sheer volume of requests and remote working and it’s understandable to see why it’s hard for all involved.
Whilst I appreciate there are immediate cash requirements for many businesses, it strikes me that the reality of knowing what quantum of support is required is some time away. There are still too many unknowns and without careful consideration of what the ‘new world’ looks like, it’s nearly impossible to know what support is required.
In essence, lender support in this environment has three key facets. Firstly, to support immediate requirements; secondly, to support the inevitable working capital required in the post COVID-19 workout; and thirdly, the Bank must take reasonable steps to protect its capital.
In panic mode, it’s understandable why borrowers focus on the near term but it’s the medium term that will define business recovery.
We are all essentially ‘starting again’ so how does this affect the normal working capital cycle and why might tools like CBILS be key to helping restart business? In essence, what do we need to consider in funding the working capital of a ‘start-up’ economy?
- Employees are the one certain cost that must be paid.
- The JRS has been welcomed with open arms but how does it end? When does it end? Will it be tapered off? Will it end immediately? The reality is we don’t know but we can make assumptions and model accordingly.
- Customers will no doubt push for extended credit terms.
- What will consumer spending patterns be and how will this affect turnover? Many will have suffered income losses or job losses which could significantly reduce normal spending patterns.
- Credit insurance may become more challenging in the market and those that use invoice discounting to fund working capital may have issues with old debts, credit risk and insurance that could impact upon funding or bring new risks to your balance sheet beyond this shock.
- Will supply need to come from a local source and with a new relationship will there come constrained credit terms?
- Do you need to hold stock in case of a second wave of COVID-19 and what are the working capital and cash implications for attempting to mitigate this risk?
- Suppliers will want paid up front as they manage their own cash positions and bad debt risk.
- Logistics/shipping times could continue to be interrupted or delayed depending on the geography of sourcing of your materials and how that location is coming out of lockdown.
- Capital Expenditure / R&D
- Is there a requirement to integrate e-commerce / supplier or customer microsites
- Is IT infrastructure spend required to plan for a second phase of remote working or indeed as a longer term plan for the business?
- Non-core divestments
- Do you have non-core assets or businesses in your group that it may be worth considering disposing of to generate cash?
- Market valuations are likely to be low for assets like this in the immediate term but could planning for this be a method to get a cash injection in the future to focus on core strategic activities?
- Business interruption claims
- How long will a claim take? Will the insurer pay out or will litigation be required? How is litigation to be funded?
I’m not sure any of us actually know the answers to each of the questions above. The exact work out will likely become clearer as time progresses but despite these unknowns we must start considering them now and modelling what our own ‘start-ups’ looks like. It’s often said that models aren’t worth the paper they are written on as something always changes. I think in this instance that has in many ways never been truer but without key financial information or scenario analysis how can a business owner ever make an informed decision?