Join us - Friday 29 September 2023

The Business Improvement Summit


Featuring 'Blog From the Dog


Surviving the recovery - you didn’t get this far to fail now

At some stage, in the not too distant future, business will return to some semblance of normality. It is important that you:

  • Plan for this recovery
  • Are ready to take advantage of the opportunities that will be there for you
  • Are able to trade through the period of recovery

The 5 key action points:

  1. Don’t fall into the overtrading trap.
  2. Have your plans ready for the recovery phase when it arrives; remember it is a question of when, not if.
  3. Ensure that any cash flow projections prepared as part of a CBIL application have sufficient flexibility to allow you to pay for anything your business needs to service customers, as your suppliers' credit terms may be harsh.
  4. Keep in touch with your suppliers (especially if you think there will be a shortage of their product or delivery time may be lengthy). Get to the front of the queue.
  5. Plan for the ending of the Job Retention Scheme; either by bringing the workforce back on stream or making staff redundant once the end of the scheme is announced.

Avoid the overtrading trap

For businesses, going from famine to feast can, paradoxically, be worse than going from feast to famine.

At some stage, businesses will start to see the green shoots of recovery; pubs will be open; shoppers will be back on the High Street and demand for their services will be on the up. However, for those businesses that have had a period of no income, the temptation to grab all the work/business that they can, may be sowing the seeds of business failure. Having survived the crisis to this point it would be tragic to fail through overtrading.

So, what is overtrading?

Essentially the business runs out of money by tying up all remaining cash in buying stock, manufacturing products and recalling furloughed workers back to work; before their customers pay for the goods/services that have been sold. Staff and suppliers run out of patience with yet more delays in getting paid - they will also have a cash requirement. The business folds - when a lower level of trading could have been managed, allowing the business to continue trading into the future. 

To help avoid the overtrading trap, a business needs to have a business plan that guides them through the recovery phase.

Plans for the recovery phase

At the start of the crisis attention was, understandably, focussed on the immediate problem; getting through the period of lockdown where income and cash flow is constrained.

Having prepared those initial plans, the next stage in the survival process must be the planning for recovery.

This plan should focus on how the business will restart in the recovery phase and should cover:

  • A cash flow and profit and loss projection to cover the first 3 to 6 months of trading of the recovery phase. This will be an extension of the original projections prepared when the crisis first made its presence felt.
  • What sales the company will make and on what terms (i.e. will it be on normal credit terms, cash up front or a mixture of the two?).  Just because you offered credit terms before the crisis does not mean that you can, and should, offer credit terms in the future.

The restriction on credit terms is, of course, a double-edged sword: 

  • Demanding cash up front may limit the sales the business can make because its potential customers will not have the necessary cash to meet your credit terms.
  • Granting credit will no doubt enable greater sales to be made, but the granting of credit will increase the likelihood of the company overtrading, until the sales can be turned into cash.

Being clear on your credit terms and building this into your cash flow projections will help ensure the business survives the forthcoming recovery.

Be ready to accept payment for your goods and services by credit cards as this will help your customers’ cashflow. Be aware of credit card charges, though, and build them into your projections.

Paying for the goods and services needed to generate income

Just as you will be deciding whether to ask for cash up front or grant credit, your suppliers will be undertaking a similar exercise. It is therefore important, if you are not going to be offered credit terms, that you have sufficient cash reserves to pay for any supplies needed to generate income.

Your initial cash flow projections needed for any loan application should have included the cash flow needed to get through the recovery phase. If these projections did not include the cash needed for the recovery period, now is the time to reconsider the position and make any necessary further loan application.

Keep in touch with your suppliers

If you need to buy supplies (raw materials or finished goods) to enable you to meet the demands of your customers, keep in touch with your key suppliers.

Determine whether your suppliers are willing (and able) to supply you on their usual credit terms, or whether they will want all (or a substantial percentage) of the purchase price paid upfront. If this is the case, you need to ensure that you have the cash available to be able to buy the supplies you need to generate sales. If cash is going to be an issue for you, investigate whether your supplier will accept payment by credit card. If so, organise a business credit card to use when the recovery starts.

The main purpose of keeping in touch is to ensure that you are at the front of the queue to buy stock or supplies when the lockdown is over.  It is going to take time for the supply chain to get back to normal. While there may be some stock in warehouses and shops, it may take time for the next round of supplies to reach the warehouses. This could lead to a shortage.

If there is a shortage then your suppliers will be in a position to pick and choose who they supply first. It is therefore important that you are one of their chosen customers so you can get on with your business.

Plan for the end of the Job Retention Scheme (“JRS”)

At some stage the Government will announce the end of the JRS. We do not know how this will be done, but businesses will have to match the return of employees with the likely demand for products and services.

We hope that the closure of the JRS will be a phased one so that some employees can still be retained on furlough while more workers are returned to the workforce to work full time.

Employees who are returning from furlough will have to be paid in full at the end of the month (if paid monthly). The cash flow projection needs to plan for the wages cost in full (and then in due course the PAYE deductions that need to be paid to HMRC), which will put further strain on the business’ cash flow.

It is likely that, when the scheme comes to an end, some employees will be made redundant. Employers will not have sufficient work for them and may not have the resources to continue their employment as the recovery gathers pace once the JRS closes.

If you believe that redundancies will be inevitable once the JRS comes to an end (even if the recovery is underway) you should be taking advice from your HR advisers. They will advise how to undertake the redundancy process to avoid any employment law issues.

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