This is a thought leadership article by PrimeGlobal member firm FRP Advisory in which Restructuring Partner David Shambrook explores the steps businesses can take to retrench their operations and bolster their resilience in the months ahead.
For more than half the year now, businesses up and down the country have faced unprecedented challenges due to the pandemic – contending with drop-offs in demand, disruption to supply chains, mandatory closures and the hurdles of adapting workplaces and ways of working to meet the constraints of a COVID world.
The months ahead will undoubtedly bring new pressures, as firms contend with the effects of tightening restrictions and deferred liabilities. Not only will firms have less financial support, they are also likely to have to start paying back debt generated through government support schemes while potentially continuing to operate with smaller revenues and a reduced workforce.
Developing a strategy to build resilience and deliver a recovery is therefore critical and one of the biggest challenges of our time. Each business’ approach will need to be tailored to its specific needs. However, there are some simple but effective steps they can take to give them the best chance of heading in the right direction.
Any resilience strategy will be underpinned by a detailed understanding of working capital requirements.
Cash is key when managing headwinds – with cash you can buy time, and with time, options. As a first port of call it is essential that business leaders build a detailed and accurate understanding of their cash position, and how it could change in the weeks and months to come.
If they haven’t already, management teams should develop a 13-week cashflow forecasting model, conducted at a granular level and updated on a regular basis. This information can help leaders to understand – or anticipate – where pressure points lie in their business, and begin to identify solutions accordingly.
Once this is in place, leaders should look to build longer-term, integrated financial models that bring together profit and loss, balance sheet and cashflow information. They can then consider scenario planning and stress testing to determine how their cashflow and working capital requirements could be affected by conditions down the line, such as a further tightening of lockdown restrictions.
Within this, it will be important to factor in any deferred liabilities – such as VAT repayments or rent – that could become due over the forecasting period.
Once a business understands its cash position and requirements, it can then consider the steps to take to give itself extra headroom or meet any anticipated shortfalls. Here, management teams may need to consider reducing their business’ cost base – reducing any discretionary, non-essential spending, or postponing any planned capital investment projects.
Although it may be a difficult decision to make, leaders should also review whether they might be able to divest non-core parts of their operations in cases where doing so would enable them to reduce overall costs and re-trench in their core areas of business.
Be mindful that in a lot of struggling businesses, the non-core element that can and should be divested is often a part of their overall business that is doing well. Ultimately, it is these parts of a firm’s operations that are likely to be the most attractive to prospective buyers, and therefore the most easily divestible when the time comes.
COVID-19 has changed the business landscape for many, and challenged businesses to work in different ways. Adapting to the new economy is likely to require different skillsets to those that a business already has in place. Businesses of all sizes should take the opportunity to review their leadership structures to identify where a firms’ interests could be best served by reshuffling existing team members, and if needed, identifying where external support may be required.
Finally, it is impossible to understate the value of maintaining good, transparent, communication with stakeholders and partners. Keeping communication channels open for suppliers or partners can pay dividends when building and implementing resilience strategies.
For example, businesses may need to negotiate new or additional concessions from partners on outstanding liabilities. Firms that proactively engage with their stakeholders will likely stand the best chance of securing flexibility from those around them.
Here, having strong management information – gleaned from systems such as an integrated cashflow model – can really help. Backing up requests for flexibility with data will help key financial stakeholders better inform their own decision-making when it comes to deciding the degree to which they can support a firm.
Meanwhile, maintaining good contact with suppliers can help businesses to increase visibility over their supply chain – enabling them to spot any supply bottlenecks, or partners in distress early, and act accordingly. If a business begins to see cracks in its operations, early action is key.
It can be tempting to ignore any issues with the hope that they will improve. However, addressing problems as soon as they appear – and seeking any help needed – will maximise the amount of time management teams, their advisers and partners have to assess the issue and consider a range of possible options. This will in turn maximise their chances of recovery.
The last year has been extremely challenging for businesses, and pressures will persist in the year to come. However, taking steps to gain deeper operational insight, streamline business models, drive efficiencies and maintain clear communication lines will help business leaders navigate these difficult conditions and prepare for better conditions in the future.
FRP is a leading business advisory firm with a strong reputation for providing cross-border solutions to create, preserve, and recover value across a range of complex stressed and distressed situations. Working across the board, from multinational organisations to small enterprises, we develop effective strategies for all kinds of businesses.Learn more