Planning ahead - key questions for SMEs

Restructuring and Insolvency

Director Rik Heap looks at recovery, costs, diversification, funding and communication it has been an unprecedented and challenging year for all SMEs and the key advice that were offering to all business owners is to plan.

What is the starting point for implementing recovery in a business?

There are generally two key questions to consider when looking at business recovery:

1) Is the business viable now or can it be made viable? If the answer is yes, and hopefully it is, then you have something worth trying to save.

2) If the answer to the first question is yes then the second question is how much time do we have? If management cant afford to pay the wages at the end of the week then thates a very different problem (and therefore approach) to a business that is forecasting a cash problem in three months time.

There is also a third consideration that seems particularly relevant during the current pandemic do management have the appetite to fight to save the business? Business owners and management are key to the success of any turnaround and sadly, we have seen businesses over the last year, where management have simply had enough and want to call it a day.

What are the cost areas which can be cut promptly with minimal disruption?

Some of the support measures that the government has put in place since March last year have helped enormously here. Packages such as the furlough scheme and deferring HMRC payments, along with support from banks offering repayment holidays on loans, have enabled many businesses to avoid or at least push back some significant costs.

Otherwise, wed always recommend looking at your P&L account with a really critical eye, focusing on the biggest cost lines, to see where savings could be made. With a manufacturing business for example, you may want to think about only buying the raw materials that you need, rather than for stock although clearly, lead-times and the need to meet customer demand will always be key considerations.

Discretionary spending on luxury items like entertaining are always worth a look although the amounts are often nowhere near as significant as key operational costs like wages and raw materials.

Overheads can hold some significant costs although larger items can often be difficult to cut quickly.  Terminating or renegotiating property leases or asset finance agreements may not be feasible in the short term but, in these unprecedented times, if you engage positively with landlords or lenders they may be willing to extend payment terms or offer payment holidays.

Should businesses look to recruit more sales personnel?

It depends on the nature of the business. For many businesses that have seen their activity levels hit by the pandemic, the best option in reality has been to reduce the size of the workforce and for those that remain to have to step up and do more in order to survive.

However and we shouldnt forget this there have been some real success stories of businesses that are either in a sector that has experienced unprecedented demand (who had even heard of PPE 12 months ago!) or who have pivoted to turn what they used to do into something thates now in significant demand. Those fortunate few may well need to recruit more sales people to maximise their opportunity.

Is this a time to think about diversifying into a new customer base and develop and introduce new products and service lines?

Similar to the previous point, it very much depends on your industry. Some businesses are simply trying to survive right now by sticking to what they know perhaps on a reduced scale to ensure they are still around once the world returns to some kind of normality.

But we have seen, that even during a global pandemic, there is still significant demand for many products and services and people are seeking to satisfy that demand. One thing that is clear is that, even in the difficult times we find ourselves in, the entrepreneurial spirit always finds a way to succeed. Those business owners who spot an opportunity and have the guts to go for it will often do well.

Are there any options to raise finance to ease cash flow when your business is in trouble?

Absolutely the government-backed CBILS and BBLS loans are still available, along with various grants.

Additionally, more conventional debt such as bank loans or asset-based lending remain available to businesses that meet lending criteria. But the term lending criteria is a critical point a funder is unlikely to lend money to a business that cant demonstrate a viable model and that has been particularly difficult for some companies in these exceptionally challenging times.

Wed always advise business owners to think carefully about future viability before taking on more debt, especially if that means providing personal guarantees, as this could lead to bigger problems further down the line.

How important is communicating well with and reassuring staff, customers and suppliers?

In a word vital. Without your customers you have no business. Without your suppliers you cant make your products and without your staff you may as well not bother!

One thing we have been continually advising business owners to do since Covid arrived is to make sure they communicate with all stakeholders.  Certainly, ites never be more important to be talking to your customers both to understand their requirements/challenges but also to identify any problems with collecting debtors.

Similarly with suppliers you need to ensure you can still get the services and raw materials you need. And if youre struggling to keep up to date with payments then talking to them in advance is far more likely to secure to their support than just ignoring the issue.

Talking to your staff to keep them on-side is even more important. Weve done it with our own team at LC as weve all been through (and continue to be in) some really worrying times for everyone. You really need your own people to be as reassured as possible and to know just how valued they are. Without them you simply havent got a business.

How do business owners keep lenders and creditors on side?

Again, ites about communication. When it comes to the challenges thrown up by the pandemic were all in this together.

Suppliers have undoubtedly had to extend credit terms to businesses that have seen their cashflow adversely affected by Covid but they wont wait for ever. Similarly, banks have had to be far more understanding than ever before.

The simple advice is to engage with lenders and creditors at an early stage, especially where difficult messages need to be conveyed. And, if you make a promise to pay later as part of a deferral arrangement stick to it otherwise your credibility may not recover.

How important is the need to seek outside help quickly?

Another sound piece of advice is to remember that youre not alone there are people who can help. That might be your peers, your accountant, or a turnaround and recovery expert like ourselves.

There are a wide range of options available to business owners experiencing some form of financial distress. Many of them are positive and often dont result in any type of insolvency process. Even an insolvency process can be used as a recovery tool to preserve a business and protect jobs.

The key thing to remember though, is that ites vital to do something rather than bury your head and hope a problem will go away. And ites critical to act quickly the sooner you talk to someone the more options youll have available and the greater your chances of finding a positive outcome will be.


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