4 steps to ease the cash flow of covid-stricken businesses
The now nine months of unprecedented uncertainty brought about by the ongoing Covid outbreak has seen the revenues of businesses across the UK plummet. However, while income has fallen, expenditure has remained at similar levels, with landlords, suppliers, HMRC, lenders and other common creditors still needing to be paid. That has put an inevitable squeeze on cash flow, pushing many small businesses without sufficient cash reserves to the brink of insolvency.
In this guide, we’re going to take a look at four simple steps businesses can take to ease their cash flow problems and make it through this incredibly challenging situation.
1. Reduce your variable costs
When your income is down, the quickest and easiest way to ease the pressure on cash flow is to consider the immediate steps you can take to reduce your variable costs. There are numerous cost-reduction levers you can impose, such as eliminating all non-essential travel and meetings, introducing a hiring freeze on putting restrictions on discretionary spending.
The furlough scheme has helped millions of businesses reduce their spend on labour without having to make redundancies. Encouraging employees to take their available leave when the output of the business is down can also help to reduce future liabilities. If necessary, even offering voluntary leave without pay can help to preserve the cash your business will need to pay its liabilities.
2. Explore your funding options
In these unique circumstances, you should not assume that finance methods you had previously relied on will necessarily continue to be available. You should engage with your lenders to ensure that your existing lines of credit will remain open. You should also explore the other finance options that might be available should you need a cash flow injection.
For small businesses, the government’s Bounce Back Loan Scheme has proved to be effective, with more than one million loans approved to the value of more than £30bn. Loans are available to UK-based firms that were in operation before 1 March 2020 and have been impacted by Covid-19. Businesses can borrow between £2,000 and £50,000, capped at 25% of their turnover.
Another benefit of the Bounce Back Loan is that it is 100% guaranteed by the government. According to Tony Smith from Company Debt: “That’s huge for small business owners who are in the midst of a cash flow crisis and are struggling to survive, as it allows them to access emergency funding without having to sign a personal guarantee. If the business were to fail with a Bounce Back Loan, the company directors would not be personally liable for the repayments.”
3. Extend your payables where you can
The government has given businesses the option to defer the VAT payments due between 20 March and 20 June and repay them in monthly instalments throughout 2021-22. That gives businesses a simple way to keep more money in the business now to pay bills and stay afloat.
Another way to preserve working capital is to delay payments to suppliers. However, this approach should be used with caution, as businesses risk damaging supplier relationships, and worse still, depriving suppliers of the cash they need to operate effectively, which could lead to delays in the delivery of a business’s own products and services.
If you are struggling to make payments to creditors such as suppliers, landlords and HMRC, it’s always advisable to contact them first to explore your options. In many cases, creditors may be willing to give you more time to make payments rather than facing the prospect of losing a valuable customer or tenant.
4. Consider alternative revenue streams
If the Covid pandemic has hit your traditional revenue streams hard, there could be ways to temporarily or permanently diversify your offering to replace that lost income. Introducing new products or services or selling online rather than solely through brick-and-mortar premises could open you up to new customers. Similarly, if your primary market is domestic, selling internationally online could be a relatively simple way to boost revenues without the requirement for a significant capital investment.