In a recent poll, around a third of our clients told us that they believe their business will be significantly changed by the time the COVID-19 situation is resolved. Alan Dale explains that, now is the time to think about re-imagining the way we all work for the future.
Navigating through the temporary measures put in place during the COVID-19 outbreak will mean making some difficult decisions. The initial concern will be how to restore your operations back to how they were before the pandemic. However, discussions with our clients are showing that many of them are taking everything they've learned during the last few weeks and using it to rethink how they will do business in the long term.
For example, one of our clients was about to acquire large premises in central London. They've advised us that they've put a hold on this, not because of the reduced cashflow the outbreak has caused, but because the situation has shown them that remote working is a feasible option for their workforce and they no longer believe a large office is necessary.
Three steps to maintain your operations
In light of these insights, how do you determine what the new normal will look like for your business? We're recommending a three-stage process:
Assess the situation with data, to identify and prioritise issues
Protect your business by making agile decisions
Restore your business through a suitable plan that challenges your current commercial and operational assumptions
It's important to realise that this isn't a linear path. Parts of your business will be at different stages and, overall, you may move back and forth between them. However, in a quick survey we took, 20% of our clients felt that they were in the assess phase, 74% were looking at protect and 7% were already thinking about restore.
So, what do the stages involve?
Since most of our clients have moved on from the assess phase, I won't spend much time on it. But it is vital that you return to this stage regularly as we find out more about the duration and severity of the crisis. The landscape is changing rapidly and being aware of what's happening in real time is vital. That's where the value sits.
When talking to us about assessing their circumstances, the first question our clients are asking us is what kind of timescales do they need to be forecasting for? We suggest looking at six weeks, three months and six months. The situation is changing so quickly that, it's vital that you start modelling for more than one scenario. This is why it's important to continually re-assess your position on a regular basis.
With customers isolated in their homes and many offices closed for business, revenue has decreased for many businesses, resulting in a lot of firms struggling. However, some sectors, such as supermarkets and home-delivery services, are finding challenges in dealing with a vast increase in demand. With these dramatic fluctuations in the status quo, it becomes increasingly difficult to obtain accurate management information (MI). The finance function is tasked with determining contract renewal dates, accurate cashflow figures, true costs and where revenue is coming from.
Since you probably don't have the resources to rebuild your reporting system, you have to make the best of what you have already. This means making key decisions based on imperfect data. However, in the current circumstances, it's better to make wrong decisions that you can revisit than to make none at all. The solution to protecting your business is to make agile choices that aren't final. Use Sheryl Sandberg's philosophy to quickly choose a strategy, "fail fast" and then try again.
The two important decisions you need to make to protect your firm are how you're going to handle your cash and what you're going to do about your costs:
You need to have a laser-like focus on your cashflow. Look at all the self-help measures you have available to you to increase your cash before you take advantage of government loans and support. But if you do choose to go to the government, there are no less than 13 programmes available to you. Take the time to find the right one for you.
When it comes to your costs, think - what can we stop? What can we rein in? And what is the quantum of expenditure that we can get by with? Most of our clients are focused on their workforce expense because that's where the government guidance has been focused, but what else can you cut back on?
Look at your budget from a zero-based budgeting perspective. Where you think you can't cut costs, you can. You'll be surprised by what you can make do without.
When you're looking at contracts, remember that your suppliers don't want you to go under either. Look into renegotiating your rent and utility bills, or even taking a payment holiday. You may well be able to lower your outgoings on goodwill alone.
The Coronavirus Business Interruption Loan Scheme (CBILS) currently caters to businesses with annual turnover of up to £45 million. This cap will apply to your group of companies as a whole, so you will not be able to apply for each company in your group.
CBILS will offer to guarantee loans of up to 80% for facilities up to £5 million over six years, but only for the lender. The borrower is always liable for the full amount of the loan. The borrower must also demonstrate that the funds will be used to support UK business through issues directly related to the COVID-19 outbreak and that the money will not go outside of the business.
For medium-sized and larger companies, there is the Coronavirus Large Business Interruption Loan Scheme (CLBILS). New details of his scheme are to be announced. CLBILS allows companies with revenue between £45m and £250m to access loan facilities of up to £25m, where the lender is providing the loan and can access a government guarantee of 80%.
Update:exact details of CLBILS are to be published and come into effect from 26 May.
For companies with revenue over £250m, they can potentially access a CLBILS loan of up to £200m, which will have an 80% government guarantee. Like the smaller CBILS scheme, the 80% guarantee is given to the lender and lenders offering a CBILS and CLBILS scheme must be accredited by the British Business Bank.
There are restrictions around areas, including dividend policy, senior pay and share buy-backs, which borrowers should be aware of and should discuss fully with their lenders.
Ultimately, 20% of the any loan facility is still being underwritten by the lenders and those lenders will need to go through their usual underwriting and credit procedures.
An option that is currently available to large firms is the COVID-19 Corporate Financing Facility (CCFF), where the Treasury and Bank of England (BoE) will purchase corporate paper. UK firms must show they were financially healthy before the outbreak and supply an investment-grade credit rating. The BoE will accept internal bank ratings, in some cases, so speak to your bank to have your rating released. Otherwise, rating from credit rating agencies can be obtained through accelerated ratings.
We're recommending you take seven steps to ensure liquidity:
1 Short-term forecasting
Forecast on a daily basis and include your receipts and payments.
2 Stress-testing and self-help
Extrapolate current run rates and consider a range of scenarios, including mitigating actions and self-help measures.
3 Compliance with docs
This includes representations and warranties, covenants and reporting requirements, and additional debt baskets.
4 Engagement with lenders
It's never too early to approach lenders and offer them visibility to engender confidence.
5 New capital providers
New money from third parties is available, but may take longer and require pricing and diligence considerations.
6 Working capital facilities
This includes RCF roll-overs and ABL eligibility, and borrowing base.
7 Temporary finance options
This includes tax and revenue authorities, and asset-specific finance.
Since many of our clients are already thinking about going back to business, now is the time to stretch your thinking about what the new normal will be after all this is over. You need to come back into the market in the best way, and that may not be the same way you did business before. What messages do you want to impart to your people ahead of time so they understand what you expect from the markets, the business and them, so they too can prepare for moving forward.
As we come out of self-isolation, you need to give thought to what pace you want to come out of crisis mode. On the one hand, you want to be the first company back in full operation to take advantage of the market; on the other, could you benefit from continuing to run with reduced costs for longer? If the scheme allows, you could consider keeping staff on furlough longer and phase them back in slowly.
Remember that your market may be slower to recover than you. Will your business come out of self-isolation and immediately want to sign up to a new fleet deal? Maybe not, but there might therefore be good deals for those who push.
Elsewhere, the release from social-distancing may also be phased, so you may not get all your customers back at once. Even when pubs and restaurants re-open, will there still be social-distancing measures in place, meaning you may not have the floor space to cater to demand?
To navigate through the situation, it's worth questioning the obvious decisions and keeping an eye on countries where the virus has progressed further, such as China. How did the market in these countries recover and what did the winners and losers do there? We'll cover this in an upcoming webinar.
It's not all bad news, though. This world-changing event will change buying habits, which may open up new opportunities. There may be a boom in the travel market, for example, as people crave a holiday once the lock-down eases. Conversely, customers who wouldn't normally shop online may have been forced to do so, which may increase revenue in that area in future.
We've particularly seen a ramp-up of online sales for the hardware industry. Traditional brands that were previously struggling against trendier ‘home design’ competitors are now seeing a significant upturn as we move to keep ourselves occupied at home.
The same applies for your business. Now your whole team has been working from home for weeks, do they need to come back to the office? Elsewhere, many of our clients are looking at more-local suppliers as an alternative to long supply chains to ensure greater resilience in the future. Think about ways to go back to basics, simplifying your model to remove vulnerabilities.
Turning up the dial
One key consideration is whether you will have enough liquid cash to ramp your activities back up. You may have gone through a period of reduced revenue and then suddenly need to invest in restoration activities, such as rehiring staff or purchasing stock for a new season. The solution will be to look to your new potential revenue streams and reduced costs as a way to improve your liquidity.
Your furloughed staff may have taken on other work while in isolation and might receive attractive offers to stay with their alternate employer. Could maintaining your new remote and flexible working options after the pandemic persuade them to stay with you?
Regardless of their situation, most of our clients are moving from the Assess stage into the Protect stage, and therefore thinking more about what comes after. In our poll, only 5% of our clients think their business will be the same after all this is over. One common theme recurring in our conversations with clients is what learnings they can take away from the virus outbreak to establish the new normal. The steps you take to cope with the situation could also improve your long-term resilience and agility.
Whatever stage you're at, your circumstances and your plans, your strategy needs to factor in the new normal. From improving your assessment tools and your business resilience to finding opportunities that didn't exist before the COVID-19 outbreak, now is the time to look at ways to move beyond the current situation. Very few businesses will regard their business strategy as defunct after the outbreak has passed, but many may well want to look again at the objectives and targets in the light of what they have learned. In other words, don’t dismiss this extraordinary time in favour of rushing back into the old business-as-usual. If you do, you may just miss some golden opportunities for growth.
We've been supporting our clients through all of the above phases using our cutting-edge technology, Agile infrastructure and expert teams. Our experience, clarity of thought and practical methodologies have allowed us to develop toolkits that can be deployed virtually to help you work through the current situation.
To arrange a virtual COVID-19 diagnostic workshop with our specialists, get in touch with Alan Dale.