Blair Nimmo: Scotland’s businesses facing uncertainty and liquidity issues
Blair Nimmo, head of restructuring at KPMG UK, details the ways in which Scottish businesses are facing uncertainty and liquidity issues in the current financial climate.
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.
So far since lockdown, we have seen relatively few insolvencies across both Scotland the wider UK, and I suspect we will see something similar for May. I think this is entirely down to the various support measures brought in by the Government, principally the Job Retention Scheme, but also the various bank related support mechanisms including CCFS, CLBILS and CBILS, which can be accessed by businesses depending on their size and specific circumstances.
There is no doubt that JRS, in particular, has so far prevented significant levels of redundancies and has facilitated the mothballing or hibernation of businesses during the lockdown. After a slow start, the feedback on the bank related support schemes has also been for the most part positive.
The key question is, have these measures prevented closure/insolvencies/redundancies or just delayed them? There is no easy answer to this and the final outcome will vary from sector to sector and business to business. Key questions include when will the lockdown be relaxed; if only partially, can my business operate viably in that context (for example allowing for social distancing); what will the customer reaction be; will there be problems in the supply chain and have I sufficient finance to cover most, if not all, eventualities?
As far as sectors are concerned, it is clear that areas such as retail, casual dining, hospitality and leisure and travel are amongst those most badly affected by Covid-19. The first two were already suffering pre-COVID-19 and it is difficult to see anything other than more store and restaurant closures or insolvencies and consequent redundancies. This will potentially be made worse the longer it takes before these sectors are released from the lockdown or if the nature of the release doesn’t make it possible to operate viably (i.e. social distancing constraints). Leisure and hospitality and travel and tourism are probably the next most impacted but let’s be honest virtually no business in any sector will escape pain.
That being said I do not subscribe to the view that we are heading towards armageddon and business failure on a scale never previously seen. I do think that most businesses that were viable pre-COVID-19 will survive through a combination of good business management, supportive stakeholders and time. There will also be many opportunities for businesses not only to survive but to prosper, for example, as a result of the change in working practices brought about by the lockdown (like home working) and through opportunistic acquisition through a strong balance sheet or access to funding.
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.
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.
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.
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