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Nick Levine

14 Apr 2020

Cash management during coronavirus: an accountant’s view

Given the unprecedented disruption caused by coronavirus, businesses now need to adopt a survival mode strategy. 

The severity of the situation is best highlighted by a recent survey which predicts that coronavirus will lead to a fifth of smaller UK firms running out of cash. 

The mantra “cash is king” holds truer now more than ever before. As an accountant with a specialism in SME businesses I would advise companies to manage their cash inflows and outflows like a hawk throughout the pandemic period to ensure that they are still able to continue to trade over both the short- and longer-term. 

While there will be a few outlier businesses, such as those operating in e-commerce and food delivery, who will face increased demand most will suffer from a significant drop in trade and an uphill struggle to collect outstanding monies. 

Review existing costs 

Revenues and cash collection are likely to reduce and be put under strain dramatically. In the first instance, businesses should review their existing cost base and identify cost cuttings.  

Profit and loss should be analysed in accounts on a line-by-line basis. 

Rent and salaries tend to be the highest costs within a business. If your company is based out of a co-working space, check to see whether it is closed or inaccessible. If so get an agreement to pause all future payments, or at a minimum negotiate a reduced rent.  

A drop in demand for goods and services creates a case for reducing marketing activity, and for furloughing specific employees before business returns to normal (see government support section below). 

Additionally, short term contractors are likely to be expensive, so businesses may want to implement a policy to cease all related activity until the pandemic is over. 

Capital expenditure should also be scrapped as this outlay will take time to generate revenues even under normal circumstances.  

Analyse all existing direct debits and cancel any which no longer provide a business use.  

Consider government support 

Over the last few weeks, the government has announced a number of initiatives to support businesses, including grant funding and rates relief. 

A recent headline announcement includes the ability to furlough employees, with the government paying 80% of the wages of existing staff on salaries of up to £30,000 through to the end of June. Furloughing employees can reduce the cost base of businesses while still allowing workers to receive the bulk of their salaries. One of the conditions is that employees cannot do any work while furloughed. 

Companies may also be able to access the Coronavirus Business Interruption Loan Scheme (CBILS), which allows qualifying businesses to access up to £5m in debt finance, with the government covering the interest and payment for the first 12 months.  

Businesses can navigate the full packages of business support here and should speak to their accountant for further information.  

Defer VAT payments  

Announced as a COVID-19 measure, the ability to defer VAT payments is a quick action many businesses can take to delay one of their most significant cash outflows. 

The current legislation allows businesses to defer payments due between 20 March and 30 June. 

To stop funds being taken businesses need to contact their banks to cancel direct debit payments during this period. Funds will be taken automatically if direct debits are not cancelled, and VAT returns will still have to be submitted as normal.   

Go Cashless 

Incorporating a cashless payments policy is an effective means to get invoices paid faster, and get closer to a real-time view of your cash position. 

GoCardless and Stripe are two of the most popular providers for online businesses, and offline companies can take payments via mobile phones by adopting services such as Square or iZettle 

An additional benefit of electronic payment software is their ability to integrate with cloud accounting packages directly. This allows cash collection to be reconciled into accounting records in close to real-time, giving business owners an up to date view of their cash position.  

Offer prompt payment terms 

If your business is particularly reliant on a small number of customers, and your cash position is low, you may consider offering prompt payment terms. 

For example, business customers with 30-day terms may be offered a 5% discount if they pay within a two week timeframe.  

Incorporate a credit control tool 

In the current climate, it is fair to assume that businesses will have to spend more time chasing unpaid invoices. 

This is time-consuming and can result in lost time which can be spent on more value-adding business tasks. 

Incorporating an automated credit control tool (such as Satago) can make this process more efficient by sending automated customised chaser emails, helping you better manage unpaid invoices from customers who are falling behind on payments. 

Renegotiate credit terms with your suppliers 

Requesting extended credit terms can be an effective strategy to manage working capital better, and as relationships in business are essential, should always be chosen in preference to knowingly paying suppliers late. 

Increasing payment terms from 30 to 45 days will lessen the burden on cash flow and gives companies greater flexibility to meet their financial commitments. 

Take the time to speak to key suppliers and ask them if they would be willing to extend payment terms. In conversations highlight the importance of the relationship and your intention to work with the supplier both throughout and post COVID-19.  

Consider external financing  

While the measures introduced by the government to support businesses are encouraging, many businesses will not be suitable for the associated lending schemes. 

However, businesses should still consider their options in order to pre-empt cash gaps from a drop in demand and/or delayed payment from customers.  

Short term solutions can be filled by a drawdown debt facility (for general working capital purposes) or invoice financing (for late paying customers).  

Satago’s Invoice Finance product gives businesses the flexibility to access invoice finance on an individual basis. This can work out as a cheaper solution than a standard loan as businesses only have to pay for finance as and when they need it. 

The British Business Bank’s Business Finance Guide provides a comprehensive range of types of finance available, applicable to all sizes and types of businesses.   

Risk profile existing and new customers 

During a predicted economic downturn, it is particularly important to regularly risk profile existing and new customers to give you the confidence that they will be able to pay for your products and services. 

The creditworthiness of new customers should be assessed by accessing their credit reports to check that they do not contain any adverse data such as CCJs or overdue annual accounts. 

Profiling existing customers is particularly important to businesses which are over-reliant on a small number of customers for the bulk of their revenues.  

Existing customer data should be monitored on an ongoing basis as a change in their circumstances can create the risk of a business being wound up, and monies owed not being recoverable due to suppliers not being a preferred creditor.  

Using a credit software solution, such as Satago’s Risk Insights, can save significant time risk profiling customers due to its ability to integrate directly with core cloud accounting packages, and it highlights customers who have a discrepancy between their outstanding balance and credit limit.  

Engage with the Small Business Commissioner 

Businesses which are having particular difficulty settling the invoices of specific customers should contact the Small Business Commissioner; a government-supported independent body to tackle late payments and payment practices in the private sector. 

Services offered include dispute mediation, general advice on how to deal with unpaid invoices as well as tips on putting together business contracts between customers and suppliers. 

Mediating disputes should be seen as a last resort due to their potential to damage supplier relationships. 

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Nick Levine is a chartered accountant and journalist, with a particular focus on SME and fintech. He was formerly the Advisory Lead at Deloitte’s Propel and the Head of Enterprise for ICAEW. His writing portfolio includes The Times, Wired and Real Business.