Something for a rainy day

I had a Zoom meeting with a client last week to review and sign off some accounts. 

The accounts mainly covered ‘pre-Covid’ trading so it was a solid year. The current financial year will be a different story. They are a B2C or ‘Business to consumer’ service business. They were closed and had no sales during the period of lockdown and since then sales have been ‘fair but patchy’. Further restrictions on the horizon make the future uncertain.

But this business is better-placed than most. 

During the better trading years they chose to leave a reserve in the company in case tougher times arose in the future. Tougher times have now arrived, with knobs on and their prudence has been rewarded by having a reserve to fall back on to allow for the inevitable reduction in profits and cash flow this year.

How many of the rest of us showed enough foresight and self restraint to do a similar thing? 

Not many of us I suspect. 

Of course now is not the time for accumulating reserves. Some businesses are still fighting for survival and the majority are probably just ‘getting by’. 

The medium term priority for all businesses must be to return to profitability. Government financial support has helped but we know that this is unlikely to be sustained in the longer run.

Many businesses will have taken advantage of Bounce Back Loans or Coronavirus Business Interruption Loans so cash positions may be relatively favourable. Loan repayments will commence from next year however and it is profit rather than cash which will be the key measure of longer term sustainability.

In a post-Covid world, when it arrives and business fortunes begin to turn, the first priority for many of us will probably not be setting something aside for a rainy day.

One of the lessons of this crisis however is that we all need to become more resilient and prepare for the unexpected. 

Keeping a little bit in reserve, like my prudent and far-sighted client, is something we can all benefit from.

www.base52.co.uk

Something for a rainy day

To put something aside for potentially difficult times ahead is not a new idea. It’s something most of us do to varying degrees. 

For personal finance, Financial Advisors recommend that its good practice to have an emergency fund of readily available cash to help deal with unforeseen events - a new boiler, new tyres for the car etc. An ‘ideal’ emergency pot might be about 3 months salary - enough to keep you going for a while if the worst happens. For the most organised amongst us, the emergency fund would be in addition to other longer term savings plans.

So what about the event looming on the horizon for those of us living in the UK which is not too far away - a possible no deal Brexit on 31 October? I read recently that some observers are now saying the likelihood of a no deal Brexit is greater than 1 in 3. The direction of travel seems to be changing from ‘no deal’ being a ‘possible’ outcome to a ‘probable’ outcome. The turbulence with the exchange rate and the stock market in recent days suggests the markets believe there is a strong possibility of rocky times ahead.

So what can small businesses do to prepare? There are specific, technical planning measures that businesses who import and export will need to take. For businesses that employ EU citizens working in the UK there may be changes they need to make to ensure they are compliant. There will be some changes to VAT rules, especially for exporters. These are all things that need to be looked into carefully and plans made. 

But what of more general plans? Is ‘Keep calm and carry on’ enough?

I think, probably not. I think the key thing for all businesses is to be prepared for some kind of downturn. If it’s not as bad as Boris’s, ‘Doomsters and gloomsters’ predict, that’s great. All that’s been lost is a bit of time planning and preparing.

Modelling different scenarios is worthwhile. If your sales fell by 5% or 10% for 6 months what would you do? Do you have enough reserves in the business to carry you over a hump or do you need some extra funding? Increasing your overdraft limit now, before you need it is better than asking when business finance becomes more critical. Can you cut back on some of your major costs quickly if you need to? Can you reduce your drawings from the business to steady the ship?

None of us know for certain what will happen in the next 90 days or so. A bit of advance planning will ensure we are at least prepared. So think about getting your whiteboard out next week and looking at your numbers.

If the rain does come down at least you will have your brolly with you

www.base52.co.uk