In 2008, businesses faced a crisis from the ‘credit crunch’. In 2020, credit is not in short supply – it’s sales that are vanishing.
Small businesses have been overcome by the speed with which the health crisis has accelerated in the last week.
As social distancing, self-isolation and working from home have become the new normal, companies have seen sales revenues disappear. AAT licensed accountants reported at the beginning of the week that clients were already making employees redundant.
The Small Business Commissioner is an independent body established by the Government to fight poor payment practices on behalf of small business. This week Commissioner Philip King – a veteran of the credit-control industry – went on the front foot to advise small businesses on how to increase their chances of survival.
1. Have a plan – identify funding gaps
The number one measure is to assess the current position. Most small businesses hide their heads in the sand.
“The first thing is to look ahead and see what’s coming in and what’s going out. If the owners know they are going to run out of money, they can react to it early by having conversations to manage the situation. The plan doesn’t have to be elaborate – it doesn’t need costly software. The essentials literally can be written on the back of a cigarette packet.”
2. Identify the major creditors – get them onside
Which creditors and suppliers are critical to the business? Rent and employment are generally the two highest costs, and they can cripple businesses.
For example, AAT was told of a small dance studio that would receive a business rate rebate under the Chancellor’s scheme. It has lost most of its customers, but the rebate will barely cover a month’s rent, placing it under extreme pressure.
“If a landlord is faced with the prospect of having to wait a month or two or having to find a completely new tenant at a time when businesses don’t want to move, it could well be better for them to take a payment holiday or accept reduced payment.
“If you can tell your creditor, we are perfectly solvent, apart from this exceptional circumstance, that is a much more compelling case than just asking for more time to pay.”
3. Show the business is viable
When dealing with creditors or financiers, have a business plan that shows – aside from the crisis – the business is sustainable.
“Take AAT’s example of the dance studio, if [in normal times] you have full classes three times a week, and those are booked a term advance, you can show you have steady cash flow as soon as you can re-open those classes, then that’s a very different proposition to someone who offers to open a coffee shop because they hope it might work, but they’re not sure.
“A business plan [to show this] doesn’t need to be sophisticated, it just needs to be realistic and reflect what is going out and what’s coming in.
4. Talk to debtors, accelerate payments
Don’t just rely on payments arriving – talk to customers to check they are coming through the system. Identify problems upfront.
Ask for help. The mood is one of co-operation.
“Sometimes if a small business talks to its bigger customer and says it has a problem, the big company can help. There’s often nothing to stop payments being brought forward. The nub of it is talking, and talking early on.
“I have yet to talk to a large business that didn’t make the right noises about the need to support small business.”
5. Look for new ways of doing things
Look for ways to pivot or re-orientate the business.
“I saw a social media marketing company offering free 1-hour consultations to any business suffering issues from the coronavirus on how they can expand and do things they might not have thought. I thought that was interesting. They are frankly just trying to get more customers, but they are doing it in a way that might help those businesses as well.”
6. Look at alternative sources of funding
Small firms don’t think hard enough about potential sources of funds. They tend to focus on overdrafts, followed by credit card and friends and family.
“Small businesses need to look at the options out there. There is invoice financing, asset financing and fintech options. We need banks to help them explore what’s available [and not just point them to overdrafts].”
Are staff layoffs or redundancies necessary steps?
The Chancellor has told businesses “help is coming” and has appealed to them not to rush decisions. So should companies be making redundancies now?
“It’s tough times for business large and small. If you are business with 30 people, is it better to make five people redundant and survive than to go bust in six months’ time? I suggest it is. But it’s a tough call to make.
“It all comes back to doing the thinking. If your outgoings are fixed and they can’t be moved and the income is going to stop, at least you are making an informed decision. It’s not ideal. But it’s better than burying your head in the sand, which is more damaging.”
Is the Government’s £330 billion package enough?
“What’s encouraging me is the flexibility. Within a week we’ve gone from one package of measures to something much broader. It does suggest the Government is thinking on its feet. The one challenge is how that help gets out to businesses – making sure the banks are on board and sufficiently fleet of foot to make it happen.”
Will banks and businesses support each other?
“One of the notable things is the recognition from Government and business that it is a crisis for everybody, and we all need to work together.
“What we are seeing is a real wartime spirit, a let’s-pull-together attitude. We need to encourage that. I say collaborate, don’t complicate. We need to work together to support each other.
“The banks are making the right noises. They have to do the right thing to some extent. Like the landlords, if they can keep a business ticking over it’s better for them than letting if fold and losing the entire loan.”
AAT has campaigned for prompt payments, and for it to be mandatory for large companies to pay in 30 days. Is it time this happened?
“Yes, prompt payment should be a given.”
“If businesses aren’t being paid, then the Small Business Commissioner’s office is there to help. We can intervene with large businesses and so far we have obtained seven million pounds. We invite firms having problems to get in touch.”
Phillip King is Small Business Commissioner. Over 40 years, he has held senior credit management roles in the high-tech and communication sectors, in distribution and retail, including spells at Olivetti and Vodafone. He was appointed Director General of the Institute of Credit Management (ICM) in 2005, and later Chief Executive, and was behind the institute’s drive to become a chartered body (the CICM) in 2015.
David Nunn is Content Manager at AAT.