By Blair Nimmo, head of restructuring for KPMG in the UK
“In the current environment of dramatically falling consumer demand and great uncertainty, those running the UK’s businesses will wish they had all the answers – but the truth is no one does. The best way to be armed for the challenges of now and beyond is contingency planning.
“Forecasting, cash preservation, engaging with funders and other stakeholders and accessing government support initiatives all need to be at the top of the to-do list.
“Liquidity is the number one issue. Undertake cash flow forecasts as a matter of urgency. Run them on a weekly basis, extend the horizon from the usual 12 or so weeks to 26 weeks and do them on a granular, receipts and payments basis.
“Understand the business’ payment position on everything including payroll, suppliers, bank interest, tax, pension commitments and consider which are most critical.
“The Coronavirus Job Retention Scheme (JRS), which will see HMRC reimbursing 80% of ‘furloughed workers’ wage costs, up to a cap of £2,500 per month for each furloughed employee, is of huge significance and is to be welcomed. But as it is to be run as a reimbursement scheme, employers will still be required to make payroll payments, for them then to be recovered once HMRC has established the necessary systems. And with the likelihood that this may take some weeks to set up, March salaries will need to be paid as a matter of priority.
“To this end, we see funding as a key component for many businesses, supplemented by the JRS, and coupled with a greater deployment of Time to Pay by HMRC, which relates to deferral of tax obligations, being agreed on a case-by-case basis. This is in addition to sector specific support such as rate payment holidays.
“Businesses should also consider what can be done to bring cash into the business. Certainly follow up on debtors; consider whether payment terms can be shortened or changed – for example, can up-front payment be requested? – and consider moves like offering discount for early settlement.
“When it comes to mitigating actions more broadly, we are advising businesses to think about actions as being green, amber and red – from good financial housekeeping through to actions of last resort.
“As previously mentioned, engaging with funders is going to be critical for many. And funders are facing their own challenges at the moment, addressing a significant upsurge in demand for credit; fulfilling a role as the distributor of some of the government’s business loan support; and handling some degree of staff absences. Also, while funders are going to be relaxing their position on lending, they will still be making rational credit decisions.
“It is important that a business’ case for extended credit is made clearly, early, with evidence. We are advising clients to ensure they maximise their chances of getting the financial support they seek in three ways:
- Clearly – understand your requirements ASAP
Get a clear view on the liquidity needed to get through this period in order to define the requirements for additional funding. Lenders will be considering not only whether the request is reasonable but whether enough has been sought, as well as when and how will they get repaid.
- Early – get to the front of the queue
We expect many companies to request additional support so a key challenge for lenders is likely to be processing the volume of applications.
- Evidence – make a well-grounded request
Produce a credible deliverable plan that articulates the health of the business prior to the crisis; the self-help action being taken; and how the business will return to health afterwards.
“The government support initiatives available to businesses – including the Covid-19 Corporate Finance Funding (CCFF) facility for large firms and the Coronavirus Business Interruption Loan Scheme (CBILS) which seeks to support lending to businesses with turnover of less than £45m – are evolving regularly at the moment, and it may be difficult to keep up. This will stabilise, but it’s wise for management to try and ascertain what is relevant to their business early.
“Advisors are also working through this and indeed waiting for clarity on some schemes, but many have useful checklists to share.
“It’s also important to remember that in practical terms, many of these initiatives are being established from a standing start, so processing will take time. Regardless of how quickly you might apply for help via these schemes, any sensible cash flow planning would have the cash benefit of these measures coming after April. What you can do under your own steam in the intervening period is critical.
“Finally, some businesses might consider how supportive their customers can be. We are hearing that some public sector bodies are open to their supply chain adding extra costs of sick pay to their invoices, for example. It could be worth checking whether any informal schemes could be of help.”