Working Capital | The Cashflow Clock is Ticking

Keiran Taylor

Keiran Taylor

Corporate Finance and Banking Specialist

The cashflow clock is ticking – Is your cash flow better than ever?

Since the start of the pandemic lockdown and all the issues this has created for businesses up and down the UK the focus for many owners, directors and indeed government has rightly been surviving this unprecedented period of shutdown. In fact it has been reported that in April the UK has suffered 20.4% contraction in its economy, across virtually all areas of the economy.
 
But what has been discussed much less and currently there are no specific interventions to address, is the looming working capital problems that will most likely affect many business as they start to exit from the lockdown and grow back towards “normal” levels of trading. Counter intuitively, many businesses have seen a boost to their cashflow due to a combination of factors, the cash interventions introduced by the government, taking on new levels of debt to cover fixed costs during the period of lockdown and also the liquidation of their existing working capital.
 
For most businesses, their working capital is often tied up on Stock, Work in Progress and Debtors and not as any significant amount of cash. But as they have found their businesses shrinking during lockdown these assets have slowing been turning into cash as they run down their stock and WIP and collect in their debtors, making bank balances look healthy for a period.
 
However, what is not being discussed is that the reverse is also true. Once UK businesses start to pick up trade and recover from the lockdown, they will need to replenish their stock levels and create more WIP, they will need to wait for payment on their expanding debtors and many will have new levels of debt to service once the repayment holidays have ended on their Covid-19 loans. This will all require significant levels of cash and for those that are exiting lockdown feeling a little threadbare and empty shelved, this will pose a problem for their recovery.
 
So far, throughout the crisis, the government have attempted to solve the problems as they have arisen and introduced various schemes, each aimed at supporting a particular segment of the UK economy which they deemed vulnerable or uniquely affected by Covid-19. So the question is, can we rely on them to act once again to support the UK business recovery.
 
Well, any competent manager will tell you that a risk assessment starts with the things you have control of and most would agree that the government is not one on those controllable factors.

The solution then is to take control now and plan for what a worst case scenario would look like for your business.

The first step to solving any problem is to first understand it. This will involve modelling how your business might recover from the lockdown and identifying early the pressure points in your recovery plan that may cause its failure and address these first and early. In the recent press, we have heard of significant job losses at some of the UKs biggest travel companies, these decisions are an example of how long term forecasting has been used to uncover the long term problem and identifying redundancies as a solution to the specific problems faced by businesses in that industry.
 
Forecasting in these highly unpredictable times is intrinsically difficult and so any forecast should not be viewed as a finite prophecy of the future but a way to understand what tolerance you have for change. For example, the speed of your sales growth in recovery. If sales grow at X then your forecast would tell you that the consequences would be Y but if they grow at double that speed then the issues would be what? These forecast models give you a measure to use so that as you track your sales growth in the months ahead you can spot the potential problems early and avoid or manage them, because you’ve already thought them through and planned for that scenario.
 
We are all anxious to see the UK economy return to some form of normality and as welcomed as that would be this will just be another step towards recovery and those that plan well and plan early will be best placed to survive the recovery.

Keiran Taylor

Corporate Finance and Banking Specialist