With the coronavirus pandemic continuing to disrupt businesses regardless of their size or sector, there is no time to lose in finding ways to take the pressure off cash flow and improve financial resilience.
However, it is equally important that businesses know how to recognise the key signs of financial distress and take action as soon as possible.
In response to government guidance that employees should work from home wherever possible, many organisations are maintaining business continuity by implementing remote working arrangements.
However, areas of UK business where this usually is not an option, such as the retail, hospitality and leisure sectors, are facing significant disruption to their trading activity. Many businesses are facing high levels of financial stress.
By recognising and reacting quickly to financial red flags, companies may be able to relieve some of the immediate pressure on cash flow and maintain business continuity through the crisis.
If it is becoming increasingly difficult to pay creditors or employees on time for example, this could be a sign that there may not be enough cash in the bank to weather the storm.
Another important indicator of financial trouble ahead could be sudden changes in communication patterns with key customers, and if payments are delayed, this could have a significant impact on cash flow.
In an emergency measure to strengthen the economy against the coronavirus crisis, the government has announced a £350bn support package for UK businesses. This includes £330bn in loans, £20bn in other aid, a business rates holiday and special grants for retailers and pubs, which have seen footfall dip dramatically due to advice about the importance of social distancing.
However, with application processes and criteria for claiming these reliefs still being finalised, and initiatives such as the Bank of England Lending Facility likely to require a lengthy due diligence process, it is important to note that they will not provide cash in the bank immediately and businesses should also take proactive steps to improve their cash position.
In these extremely challenging times, businesses should remember the adage that ‘cash is king’ and make cash management a primary focus. Implementing a strong credit management strategy and calling in debts where it is possible to do so could help to ease pressure on cash flow.
Over the course of the next few months, it may also be necessary to talk to creditors about extending payment terms. Once promises have been made, it is important to stick to them. This will build trust, helping the business in the event that a similar conversation is held in the future.
When communicating with creditors about late payment, clearly explaining that it will not be possible to make the payment on the due date and setting out the steps that will be taken to ensure they get paid is vital to maintaining valuable business relationships.
When a business owner spots the first signs of financial distress, they should seek advice from professional insolvency practitioners and business recovery specialists. These advisers will be able to suggest practical solutions for improving cash management and operational resilience.
This is an exceptional crisis which is bringing unprecedented challenges for businesses in every industry sector. While all organisations will face difficulties, it must be hoped that with a strong focus on cash management, businesses will make it through the crisis and become more resilient as a result.
• Simon Underwood a business recovery partner at accountancy firm Menzies LLP.