Getting Through a Crisis

April 26, 2020 6:32 pm

by John Forgan

John is TTI’s Company Secretary and Financial Controller.  He is a Chartered Accountant and Director of Business Strategy at Ward Williams Chartered Accountants.  He is also a Visiting Professor at the Russian Presidential Academy of National Economy and Public Administration – Moscow and an Associate Academic at two London Universities.

 

 

In these difficult times virtually all businesses large and small will be struggling.  The travel industry will be no different however as this is a global crisis the travel industry is likely to have a much longer recovery timescale.

 

There seem to be two key questions:

  1. How do I get through these very difficult lockdown weeks?
  2. What will my business be like post-lockdown?

Before going on there are some points to keep in mind:

– Everyone is up against this incredible situation, it’s world-wide – even Donald Trump’s USA!

– We will come out of the pandemic and if the Office of Budget Responsibility is to be believed the economy will bounce back.

– However, the travel industry faces a particular struggle. Talking to travel industry colleagues there is a growing feeling that things will improve next year when UK domestic travel picks up before moving to Europe and eventually longer haul will restart.  So we are looking at some time.

This five-point plan is focused on what you can do during lockdown to get your business through the pandemic and hopefully in a place where it can move forward.  Much of it is common sense however it sometimes helps to hear it from someone else. Summary of main points:

  1. Control cashflow.

  2. Keep talking.

  3. Take all the help you can get.

  4. Spend time thinking about what your business will look like post-crisis.

  5. Look after yourself.

 

 1. Control Cashflow

To state the obvious, it is more important than ever to understand and manage the cash flow of your business. We are quite a few weeks into lockdown so many businesses will have already taken these steps but may still be juggling and making difficult decisions. Much is common sense, but we hope that you will find it of help.

Cash is King

The starting point is what is your current cash position at the bank? And where you have funding facilities, such as an overdraft, what is the remaining headroom in those facilities?  Then there is your “Burn Rate” which is a measure of how fast a business spends its available cash. This is a concept usually associated with start-ups who have yet to generate revenue but is particularly relevant in the current crisis. In simple terms if a company burns cash too fast, they run the risk of running out of money and going out of business. Typically burn rate is measured in months but during a crisis is could be weeks or even days.

The action is then what can a company do to slow down its burn rate and access additional sources of funding? Can you buy yourself time to get through this period?

When looking at your current facilities remember to consider the impact of the crisis on your ability to continue to utilise your existing facilities. What are the terms? For example, many business use Invoice Discounting (ID) facilities to fund their businesses. While there will be an absolute limit on the funding available it will also be typically restricted to a set percentage of the debtor book.

Debtors

Collecting the cash from your debtors through effective credit control is even more important now. However, the environment has changed. In many cases your customers will struggle to pay you on time and the normal debt recovery processes may not be available to you as you can’t collect what does not exist.   It is important to talk to your customers and understand what their position is and, if necessary, discuss what revised credit terms and payment schedule is possible so that you can plan your own cash flow. If your debtor book is insured check the terms of the policy. Make sure that you take all necessary steps to be able to make a claim under the terms.

With credit insurance, do not assume that you will automatically be covered if you are completing work. The banks/insurance companies are continually revising (downwards) the level of exposure they are willing to take with each company. Keep on top of this.  Remember that the policy is likely to kick in only once you have invoiced and the product/service has been delivered.

The final point to make is to be sure that new invoicing is still happening as quickly as possible – if anyone in the travel industry is still invoicing!  Key to getting the money in, is getting the invoices out, with the correct purchase order details where appropriate. Your customers may not be able to pay these invoices within terms but unless you get them out you can’t start the conversation.

Work in Progress and Orders

If you have work in progress of any kind or confirmed orders, go back to your customer. Understand whether they still need the work and when they will need it. If they request a delay to delivery can they pay for the work you have already done? Do they already owe you money for previous work, if so do you release the work on a pay as you go basis (i.e. get your cash before delivery and do not increase your exposure to that customer)?

Of course, there are legal obligations that your customers will need to honour but consider it first from a cash flow perspective. Enforcing a contract will likely take many months and will your customer be able to settle in any event? What does the above mean to the relationship with your own suppliers? Are they able to work with you to mirror the changes in your own customer requirements?

Overheads

What overheads can be delayed, reduced or avoided? If your business activity has reduced some variable costs such as travel will reduce automatically, and some costs can be cancelled/suspended as they are simply not needed.

Are you able to reduce your fixed costs or convert those fixed costs into a variable cost, for example agreeing a service on a turnover basis (for example rent) or an “as needed” basis (subscriptions)?

Many agreements have notice periods attached or protections built in for default but one would hope that there can be a sensible conversation in most cases.  In this situation it is important to remember that the supplier on the other side of the conversation is likely to be in a very similar position. They are dealing with the same stresses and pressures. It is about communicating so that resources can be matched to need as far as possible.

Looking at premises, many landlords and tenants are having conversations and reaching voluntary arrangements about rental payments. The government recognises businesses are struggling with their cash flow due to Coronavirus and remain worried about eviction. It has been announced by the government that commercial tenants who are unable to pay their rent because of Coronavirus will be protected from eviction. No business will be forced out of their premises if they miss a payment in the three months to 30 June.  Of course, many businesses can’t currently access their premises.

Preparation of Cashflow Forecasts

You need to be able to pull together all the actions you have taken to see what the overall impact is on your business.  You do not necessarily have to prepare sophisticated forecasts, but all businesses should prepare a rolling 13-week cash flow and keep it updated on a regular (possibly daily) basis. This will help you identify the crunch points in that cash flow.   Cash flow forecasts are based on making assumptions about the future but in such a fast-changing environment this is difficult for anyone. Stress test your assumptions by considering the impact of different scenarios. Consider what your response would be to them.

2. Keep Talking

It may seem obvious, but it is very important to communicate with as many people as possible. They will understand as they are most likely to be in a similar situation.  They will have far more confidence in you and your business if they feel that you are managing the situation.

The main groups of people you should be talking to are:

– Customers

– Suppliers

– Landlords

– Bank manager

– Other providers of capital

– HMRC

– Your accountant

– Last but not least business peer group – TTI.

Going forward you will need to get a view on what the post Covid-19 travel industry will look like and talking to peer group businesses will be very important as will maintaining your network of customers and suppliers.

3. Take All The Help You Can Get

 

Loan (Capital) Repayment Holidays

Talk with your bank and other lenders you have agreements with to see if you can agree a loan repayment holiday to assist with cash flow. This can include the commitments you have with leasing companies.  Care needs to be taken in the negotiations but with historically low rates of interest this should not put a significant additional financial burden on the business over the longer term.

HMRC Time to Pay Arrangements (TTP)

Q1 VAT payments are deferred, there will be no VAT payments for the 3 months to the end of June. Businesses will have until April 2021 to pay this back.  No interest or penalties will arise on the VAT deferred.  VAT refunds and reclaims will be paid by the government as normal.

The deferral is automatic however companies with direct debits to pay VAT to HMRC will need to cancel these. VAT returns still need to be prepared and submitted on time.

In addition, businesses with outstanding tax liabilities (including PAYE, NIC, VAT, Corporation Tax) may be eligible for further support which will be reviewed on a case by case basis.

A dedicated helpline has been set up by HMRC at 0800 024 1222 (and webchat). It is a simple process and broadly HMRC will agree deferment of taxes over a 6 to 12 month period.

Support for Businesses that Pay Rates

The government is introducing a business rates holiday for retail, hospitality and leisure businesses for 2020 to 2021 tax year.  This help is likely to be of minimal assistance in the travel industry directly but will help members in the hotel industry.  This support will be administered through local authorities who will adopt a local scheme. The business does not need to take any specific action, the local authorities will contact the qualifying businesses directly.

Grants and Funding

In addition, grants and funding will be provided to retail, hospitality and leisure businesses operating from smaller premises, with a rateable value between £15,000 and £51,000.  Small business grant funding of £10,000 for all businesses in receipt of small business rate relief or rural rate relief is also available. There is also a Coronavirus Future Fund. This scheme will issue convertible loans between £125,000 to £5 million to innovative companies which are facing financing difficulties due to the coronavirus outbreak.  The scheme is due to start in May. Full criteria are yet to be published but match funding will be required.

Help with Staff Costs

For many businesses this is the biggest cost and in practice the most challenging to manage.

The government has introduced the Job Retention Scheme (JRS), the full details of which can be found at https://www.gov.uk/guidance/claim-for-wages-through-the-coronavirus-job-retention-scheme .

The overall objective of the scheme is to keep people at home while enabling employers to retain staff who would otherwise be made redundant and will be required when they begin to rebuild their businesses in the future. This will enable work to begin again with a critical core who have the necessary knowledge.  Unlike many of the other government initiatives this scheme provides for an absolute cash saving, rather than simply a cash deferral, in that the grant covers the full cost of each employment up to £2,500 gross per month per employee plus the associated Employer National Insurance and Pension Contribution.

However, furloughed members of staff must not work for the employer during the period of furlough (a minimum period of 3 weeks). You will need to assess your business needs over that period; match your staff cost to your immediate revenue as far as is possible (for some this is easier than for others). If you cannot furlough your staff because you have some committed work that they need to work on, consider offering reduced hours as an alternative (subject to HR advice)?

Communicate with your staff. They will understand and want to help where they can.

Where there is one employee who is also a sole director for example under an IR 35 arrangement, then that director can be furloughed.  Where furloughed directors need to carry out particular duties to fulfil the statutory obligations they owe to their company, they may do so provided they do no more than would reasonably be judged necessary for that purpose, i.e. they should not do work of a kind that they would carry out in normal circumstances to generate commercial revenue or provide services to or on behalf of their company.

Currently the scheme will fund staff costs until 30 June but the Chancellor has indicated that the scheme could be extended.

Coronavirus Business Interruption Loan Scheme (“CBILS”)

The Coronavirus Business Interruption Loan Scheme (CBILS) provides financial support to smaller businesses (SMEs) across the UK that are losing revenue, and seeing their cashflow disrupted, as a result of the COVID-19 outbreak. Full details of the scheme can be found at: https://www.gov.uk/guidance/apply-for-the-coronavirus-business-interruption-loan-scheme .

Anecdotal evidence is that many businesses are finding the process challenging, in particular around the issue of personal guarantees. The British Business Bank has confirmed that the Big Four banks have agreed that they will NOT take personal guarantees as security for lending below £250,000 but the interpretation of this statement is inconsistent at best. More needs to be done to get the banks lending to the businesses that need it.

However there is one fundamental fact that applies to CBILs and all actions taken to defer payments; they will still need to be paid. The decision you need to make is whether the access to finance will enable your business to trade out of any short-to-medium term difficulty or do you need to consider other options in addition to this. Are there other actions you can take to restructure the business? Of course this is a very wide question but if you have not yet asked it now is as good a time as any.

The HMRC schemes referred to above are basically as at the time of writing.  This is a dynamic situation and you can keep up with all government coronavirus business support initiatives at:

https://www.gov.uk/coronavirus/business-support .

4. Take advantage of imposed down-time

As business owners we are not likely to have so much to do, so with the restrictions you can catch up with some of the admin but also create new marketing content, develop social media connections and work on your post-lockdown strategy.  All of this will be able to add value to your business going forward. Much of this you can do on your own but often working with others will help with creativity.

Collaborations

Try working with other businesses. Collaborations can be very powerful, often adding up to more than the sum of the parts.  Obviously, care will have to be taken with regard to client confidentiality and intellectual property, hence a Memorandum of Understanding (MoU) should be signed.  There are plenty of template examples of MoUs available on the internet.  It would also be a good idea to set out funding and profit distribution arrangements. These can be incorporated in the MoU.  Of course, in the event of things taking off a proper agreement should be crafted and this will mean solicitors. However a simple agreement should not cost much.  And in my experience if getting an agreement sorted proves hard work because the parties cannot agree on anything then there is not much hope for the collaboration!

Business Schools

You could approach Business Schools to ask if any students would like to help with media or strategy projects.  Young minds have not developed preconceptions and also are not constrained by the fear of failure, hence they are often very creative and come up with innovative ideas.  If you want help from more experienced students, request contact with post graduate students or MBAs.  Students are especially useful if you are looking at help with research legwork and or admin support if you have no staff. Usually, with regard to projects there is no fee requirement, only expenses (if any) and the students will come with a supporting academic faculty member.  Placements have not been mentioned on account of the curtailing of placement activities as a result of the current restrictions.

Professional Support

With many professional creatives experiencing difficult times in the crisis it may be possible to get some creative input from a professional strategist, marketeer media designer for minimal payment.  Many of these businesses are likely to be struggling and will be looking to develop their own customer base.

Doing It Yourself

It is possible to work on these things yourself. Many do and there are plenty of strategy tools freely available on-line from the well known Business School favourites such as PESTLE, SWAT, Porter’s 5 forces, Kaplan and Norton’s Balanced Scorecard to some lesser know tools all available on the internet.  But caution is needed here and a good combination would be your own work combined with some support from a practitioner.

5. Look After Yourself

Last but not least look after yourself.  The restrictions have been with us for some weeks now. However, it does look likely that a full lifting of the restrictions will take some time and whatever happens home working will be with us for some time.  Some key pointers on home working:

  • Run your usual routine. You could stay in PJs but getting showered and dressed for work will help your state of mind.
  • Chose a dedicated workplace away from where you sit watching TV or where you eat and where you will not be disturbed.  Make sure your seat is comfortable and you have good posture whilst working.
  • Take regular breaks.  Screen breaks are very important, as is to move about regularly.  Research has shown that frequent short breaks are more beneficial than infrequent longer ones.
  • Use technology to stay connected. Make sure you talk to people and do not go through a whole day just with messages (email, text). Research has shown that it is important to actually have conversations.
  • Plan your day – as busy people know the busier you are the more you get done.  Keep a list of tasks to help plan your day.
  • Don’t be distracted by social media – turn off social media notifications.
  • Keep on top of your IT. Report any issues and sort them as soon as possible.
  • Play music – research into The Mozart Effect shows that music in the background can help you focus, often dulling other sounds thereby reducing distractions.  Students at Harvard listening to classical music achieved higher grades than those that did not. But careful, you don’t want to get carried away with your favourite hard rock number!

 

 

I hope the above helps you in these difficult times.  Please get in touch if you want any additional pointers or you want to share your experiences.

John Forgan
Company Secretary, Travel Technology Initiative Limited john.forgan@tti.org

Director Business Strategy, Ward Williams Chartered Accountants john.forgan@wardwilliams.co.uk