How do SMEs build resilience in their business?

As Government restrictions start to ease, it's important to build resilience into your business to ensure you are prepared for the future. One of the most important areas for SMEs to consider is their working capital availability as business conditions change.

Business resilience

All SMEs have had to focus on cash flow throughout the pandemic. As the lockdown eases, you shouldn’t overlook this as the risks may escalate. During the course of the pandemic, many SMEs have added debt to their balance sheet through both traditional means and Government support schemes, with over £75bn being borrowed since March 2020.

Scheme type

Applications approved

Value of funds £billion

Coronavirus Business Interruption Loan Scheme

98,344 

23.28

Coronavirus Large Business Interruption Loan Scheme

716

5.30

Bounce Back Loan Scheme

1,531,095

46.53

* UK Government figures as of 21 March 2021 

The Government estimates that 42% of these loans will not be repaid, which is an indicator that many of these businesses may have difficulty paying other suppliers. As a result, businesses should place additional importance on their cash collection from ‘at-risk’ customers to ensure cash is available to the business for day to day operations.

There exists a hidden level of distress in many businesses across most sectors due to the depletion of working capital and reserves due to Covid. Further stress is likely when sales increase as a result of businesses becoming more active after Covid, where typically sales income may be received after the costs incurred to generate that income. A balancing act is required to meet the needs of servicing increased borrowing, repaying any build-up of creditor arrears, making any deferred payments to HMRC, and funding new growth. This may lead to even greater pressure on working capital.

The old adage of cash being king will remain true and the need to protect working capital will be more important than ever, given the competing claims on the cash available. It is important to ensure that you are on top of your financial information.

Some of the pressure on available working capital that arises from Increasing turnover and new growth can be mitigated for those companies with invoice finance facilities. However, caution is still needed to ensure that the resulting debtors pay within contractual terms. Late payment by debtors can lead to disapprovals on such facilities, which can create a sudden reversal of the benefits they provide.

A further note of caution is that focusing growth merely on sales without considering the cost base can lead to growth at the expense of margin, which is commonly referred to as “buying in turnover”. This was evident across certain sectors in 2009. It is a well-known trend that more businesses fail coming out of a recession, than during the recession. Given that significant business failures are likely, attention on being paid for work within the payment terms agreed and not placing too much reliance on one customer is also worth noting.

In summary, we have noted a few key considerations for SME businesses:

  • Review financial information and credit reports for key customers
  • Maintain your gross profit margins
  • Ensure customers continue to meet payment terms

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