Beware the dangers of recovery
There’s little doubt that when the ONS releases its next set of quarterly GDP figures it will show that the UK is now out of recession (recession defined as two consecutive quarters of negative growth). As the Q2 plunge was so deep, the return to growth won’t necessarily feel like we’re out of the woods and many uncertainties still lie ahead.
It’s often said, and rightly so, that the most dangerous time for businesses is not going into recession but on the way out. During a recession cash balances and balance sheet reserves often shrink and the return to growth, which usually requires fuelling through availability of cash, can put firms at risk of running out of cash as they expand the business.
But it’s different this time – business is awash with cash!
Even businesses that have been hard hit, with revenues down by 50-80% during the lockdown period, are potentially sitting on a lot of cash. Deferral of VAT and self-assessment liabilities, taking CBILS or Bounce Back Loans, support through the Furlough scheme have all contributed to cash reserves potentially being at an all time high. Trading out of the economic shock shouldn’t therefore be an issue at the present time – the cash is there to fund it. However, even with the chancellor’s latest support announced 24th September 2020, come Q1 and Q2 of 2021 there will be a real crunch. And even if cash is not currently available in abundance, you now have the opportunity to turn it around. Never has it been more important to understand the levers of profitability and cash in your business and to plan accordingly.
Action to be taken:
- Analyse how the cash flows through your business and where improvements can be made – almost every aspect of the business will have an impact on cash! (Talk to us about our cash booster health check!)
- Make projections of both profitability and cash. Play with the numbers and see how too much growth may cause an issue – if access to cash/funding is an issue then growth will need to be carefully managed – more important to focus on the quality of the bottom line and not necessarily the vanity of returning to pre-Covid revenue levels.
- Think hard about what you’re trying to achieve for your business – has it changed forever in terms of the products/services you offer? Ask your mentors/advisers to challenge you on the strategy – you’re often too close to it and see certain service lines as your baby to let go. It might be hard but it might be the right thing to do for the future sustainability of the business, which after all will affect you, your family and those associated with the business.
- Most importantly – it’s never too early to plan – you may be sitting pretty now but things can change quickly. I often talk to my kids about the formula E+R=O (Event + Reaction = Outcome). The event has happened/is happening – the only thing that can affect the outcome is your reaction. Most business have taken the action they need – but it can’t stop now. Another way to look at it is Insight + Plan = a Good nights’ sleep.