10 Jun 2020
Returning to the "new normal": Finance
Most businesses will have seen a significant drop off in trade over the past few weeks, and this is likely to continue for some time with the ongoing uncertainty about when exactly lockdown restrictions will be lifted and how quickly the economy rebounds.
This has implications for the financial health of the business, in particular with regard to the phasing out of Government support via the Coronavirus Job Retention Scheme (furlough arrangements) in a couple of months affecting staff costs – usually the most significant cost for a majority of businesses.
The most difficult task for businesses will be forecasting their financing needs for the next few months (and years) when visibility about levels of trade and demand for their goods and services will be very limited. Restrictions are gradually being lifted, but there are intangible factors here which are very difficult to predict such as individuals’ willingness to try to return to normal – for example we have already seen some understandable parental resistance to sending children back to school, and the same concerns may well hold true for businesses engaging with each other to increase economic activity.
There are several loan schemes available to businesses to shield them from the harsh economic reality of lockdown, from Bounce back Loans to CBILS and CLBILs for larger businesses, but these are loans and will have to be repaid, so are not necessarily a “silver bullet” when the future is economically so uncertain.
Accurate short term financial forecasting – even on a rolling three months basis – will be essential to manage cashflows, assess commercial requirements for contracts, staff resourcing and materials, and predict spikes and troughs in demand. The long term financial effects of this crisis should not be underestimated and therefore businesses should also have half an eye on the longer term effects on their business, and financing needs.
Loan support will only go so far and will need repaying – the difficulty is there is no long term visibility of what “the new normal” will look like and therefore forecasting future cashflows for any length of time is difficult, and the term of the support loans is likely to be several years.
Businesses must just do their best with the knowledge they have, constantly monitor levels of demand and future contracts versus staffing levels, stock holding, and investment decisions, and as we emerge from lockdown, the picture should become clearer, providing more certainty and enabling greater accuracy of forecasting and certainty to make both short and long term financing decisions.