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City of London Central London

Reflections from the SME world - Kim Dovell, Treasurer, IoD Central London

08 Sep 2020
Short of a product failure, or major incident or accident, revenue declines seldom happen overnight. 

In most cases a revenue decline is slow and often predictable and time can be taken to identify and implement the right response. What many B2C businesses experienced with Covid-19 was a cessation in revenues overnight, doors to cafes locked, schools and gyms closed, and entertainment venues mothballed.  With the fixed costs of staff, rent and loan repayments to be made, cash started to haemorrhage and without the government support initiatives, many businesses would have moved into critical care. The impact on B2B businesses may have been less dramatic but, for most, uncertainty around sustainability of revenues prevailed. 

In recent years, the sophisticated investor markets in the UK ensured there was a ready supply of investor money and access to investment, for growing SMEs, has been relatively easy.  Business plans outlining multiple funding rounds based on achievement of key milestones became the standard storyline for most companies.  No investor, be they the entrepreneur, shareholder or lender, wanted to see excess cash sitting on a balance sheet.  Businesses were encouraged to make every penny work for them, to invest in growth and increase the value of the enterprise for all stakeholders. The consequence of this is that many SMEs, particularly those on the smaller end of the scale, managed with very lean working capital structures, knowing (reasonably) that the next funding round was just around the corner and readily accessible.  The stark reality of this is that most SMEs operated with less than six weeks’ surplus cash cushion, more commonly less and, if the revenue tap is turned off completely then events unravel at an extraordinary speed. 

As a CFO and advisor to a number of SMEs, I have spent the last five months supporting businesses through the cycle of response to the crisis
• survival – treating the life-threatening symptoms, reducing the immediate cash outflow, furloughing staff, negotiating with landlords and lenders and cutting non-essential expenditures.
• stability – providing longer term stability for the business, gaining access to longer term government funding options such as bounce back loans, CBILs or additional support from the existing shareholder or lender base
• adaptation - understanding how the business needs to adapt to its new environment and ways of working
• recovery/rehabilitation - formulating longer term plans to ensure the business thrives in the post Covid-19 world.

What is evident is that some businesses have been able to move more quickly through the cycle than others.  The traits of successful companies are well rehearsed and have come into greater focus during a time of crisis.  The businesses with the best speed of response have been those with:

• strong and decisive management teams who have quality business information at their fingertips. They have been able to make quick decisions to quantify the business impact, contain costs and assemble the financial and business information necessary to support funding proposals to shareholders or lenders;

• a deep knowledge of their market, business drivers and client behaviour. They have been able to better predict the responses of clients and the consequential impact on profitability and cash;

• strong finance teams with access to good business planning tools that simulate the impact of alternative scenario and predetermine trigger points for mitigating or opportunist action; 

• management teams that have communicated well with their various stakeholders and have pre-existing relationships based on trust and flows of good financial information. They have been at an advantage, whether it is in the form of approaching existing shareholders for additional investment, lenders for payment holidays, landlords for rent postponements, suppliers to negotiate payment terms or HMRC to negotiate time to pay arrangements;

• a strong culture, providing a supportive environment for their employees, recognising that the transition to fully remote or blended working may be more challenging for some and communicating sensitively around decisions impacting employees such as furloughing and redundancies. A strong culture drives and inspires teams to connect and stay connected to the workplace and drives the optimum performance of the business from the inside out, particularly important during challenging times.  

SMEs are core to the health of the UK economy, they drive innovation, growth, provide employment opportunities and open new markets. The end of the furlough scheme and a potential second wave of the virus will bring fresh challenges. Agility and adaptability will differentiate those SMEs better able to respond to the crisis in the longer term.  

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