The past 20 years has seen more than their fair share of economic crises. The one positive thing we can say about the economic crisis triggered by COVID-19 it is that most businesses have first-hand experience of what to expect, and what they need to do to recover over the coming months.
Even so, there are many hazards ahead. My colleague Steve Russell has talked about the need for businesses to pay close attention to four key areas in the coming months – operationality, cash and liquidity, stakeholder management, and strategic options. He likens these to the tyres on a car – all four need to be in the best shape for the journey. If one blows, a crash is almost inevitable.
So let’s talk about cash. It’s tempting during a recovery for businesses to focus on growing the top line, cutting costs, and exploring strategic options such as selling parts of the business. With all the competing priorities of a crisis and a recovery, it's easy to take for granted that the cash position is visible, accessible and will ultimately look after itself. In the aftermath of the Global Financial Crisis and other regional health crises, we saw many companies recognise the benefit of doubling down their efforts on liquidity management to avert the worst case scenarios, but in many cases, was left too late.
The lag between cash position and the impact on the p&l is difficult to predict in a situation like this. To put it bluntly, we don’t know how or when consumers are going to start spending again, and many businesses, particularly those in hospitality, leisure and travel, are starting from an income base of effectively zero. Spending levels may not reach pre-COVID-19 levels for months – or years, depending on when lockdowns are no longer necessary.
In other words, it’s very difficult to know with any certainty how much cash will be coming in. What we do know is that a lot of cash will flow in the other direction. The level of Government support released to prop up business has been extraordinary; the furlough scheme alone has cost approximately £35bn (to August 2020). In addition, Businesses have been able to defer approximately £30bn of VAT payments, as well as reducing VAT rates and business rates in specific sectors, and HMRC’s Time To Pay arrangements were expanded. Many businesses have also claimed under the business interruption loan scheme. This will all need to be repaid.
We have already helped a number of clients negotiate terms with HMRC but it’s clear that if businesses want further support, they will need to show that they’ve done everything they possibly can to support their liquidity position. In the coming months, cash means everything.
With that in mind, here are five essential steps that help to protect liquidity:
Building a cash culture means more than highlighting cash as a metric – a cash conscious culture needs to permeate through the entire organisation, so everyone assesses every decision through a liquidity lens. Keeping the focus on cash will help to protect businesses on the bumpy road ahead.