Government support initiatives provide essential funding for SMEs affected by the Covid-19 pandemic. But they can also create an overly rose-tinted view of actual business performance. Are there fundamental finance issues you need to be facing up to?

 

Is Government support masking possible underlying financial issues in your business?

This is a crucial question to ask yourself, and you might not like the answer. But it’s an issue you absolutely must deal with – and the sooner the better.

As business owners across the UK batten down the hatches and brace themselves for the impact of further lockdown measures, we’re finding that many are unaware of the financial challenges they’re actually facing.

Why? Because, with the support they’re receiving in the form of grants, furlough payments and deferred VAT, everything looks just about manageable. For many firms, though, that just isn’t the case.

The dedicated funding that the Government is making available to SMEs is warmly welcomed by a massive number of businesses – and it’s providing a huge amount of support. But it could also be causing additional problems for businesses that are already struggling…

 

Amplifying already uncertain understanding

 

In our recent SME survey, we found that a worrying number of business owners are uncertain about the extent to which their business has been affected by the Covid-19 pandemic so far – and they don’t have a feel for what the situation will be in the months ahead.

This could be because various Government support initiatives are creating an overly rose-tinted view of actual performance in businesses where regular and relevant financial reporting – and particularly cash flow reporting – isn’t in place. The ability to defer VAT while also accessing furlough support and bounceback loans, for example, is often making it difficult for business owners to see the real cost base in their business right now – and to properly appreciate the full meaning of bank balance and cash flow figures.

An absence of clear understanding of what their costs and profitability would be without the support – in both past and future months – is creating another layer of confusion. And this could possibly be building a false perception of the business coping sufficiently.

Does this sound familiar to you?

On the surface, your business might look like it’s doing okay (relative to a ‘normal’ year, of course). Sure, there’s plenty of room for improvement. But the wolf isn’t at your door just yet. Is he? How will you know?

 

How to spot potential problems

 

It’s crucial that you get, and maintain, clarity on your key numbers to support your decision-making in the weeks and months ahead. Are you on top of this? Our survey revealed that only 37.7% of SME business owners are using forecasting and scenario planning as a tool to help them navigate through the current uncertainties.

Numbers never lie. But you need to look under the surface to spot potential (or actual) problems…

You might think everything’s fine, because you’ve got money in the bank. Look a little deeper though, and it could be that, in reality, the underlying trading position of the business may not be profitable and may not be cash positive. Because you’re effectively being shored up by Government support.

That’s okay, if it’s just a short-term situation. If you know you can get back to where you were before you needed the loan or before you were relying on furlough. But if you can’t do that, how are you going to repay the loan when you’re not cash positive?

Here’s another, even more pressing, question: How long do you keep the business not being cash generative, before you realise you have to actually do something about it?

 

It’s quite a common problem – even in a ‘normal’ year

 

As human beings, we can excel at kidding ourselves that everything will work itself out. We sit tight, stick our head in the sand… and hope the problem simply goes away.

At YRH, we’ve seen this time and time again, over the past 15 years (and for Jennifer, our Founder, over the last 30 years). If you’ve got cash in the bank, it can be a real mental block to look beyond that comfort blanket.

Having a healthy-looking bank balance makes you feel nice and warm, and fluffy and safe. It also stops you from facing up to those really tough decisions that, deep down, you know you really need to make. The times when you know you actually need to make people redundant, or move out of the office, or reduce your cost base.

Because you might have £200k in the bank. But your business isn’t really thriving. Perhaps your revenue’s gone down by 50% and you’ve still got all your staff. It’s just that the Government’s paying for it. For the time being, at least.

It’s a very common scenario.

 

Don’t kid yourself. Choose to be brave.

 

The risk is that you’ll kid yourself that everything’s okay. Because, in reality, a lot of business owners do this anyway. And even more so in challenging times.

“It’s okay. We’ll trade through it. I know we had a rubbish month this month, but it’ll be okay next month. I’ll just wait for next month, then review the situation.” Be honest: have you ever told yourself this? Who hasn’t? But that won’t help the situation.

What you need is the numbers in front of you. And somebody beside you, saying: “It’s not okay. You need to do something now – you’ve got to be brave. Go talk to someone. Know that it’s hard, and do it anyway. Know that it’s the biggest thing for most business owners to admit to themselves. But do something about it.”

Business owners will do all kinds of things to make ends meet for “just another month”. They’ll borrow money from friends, family, take out personal loans, draw down on their mortgage – just to avoid the big decisions, to keep everybody employed, to not be seen to be ‘failing their team’.

There’s a real danger right now that the Government’s support for SMEs is masking some serious underlying issues – and holding some business owners back from the actions they really need to take.

 

What can you do?

 

Be sure of your situation. Understand what the real position is in your business. If the Government support wasn’t there, would you be taking action to streamline processes, cut costs, restructure?

Work through this simple exercise: Grab your spreadsheets – profit & loss report and your cash flow forecast (you need to look at both together) – and remove all the crutches currently in your business (loans, furlough payments, additional funding and VAT deferral, for example) and then ask yourself if you can still stand up. If you can stand up unaided, can you take a step forward? Can you take two steps forward? Can you walk?

A lot of business owners don’t know the answer to this. But you really need to get to the bottom of it. You may need to have some difficult conversations – with yourself, and possibly with your team.

The numbers will give you the truth. And that will give you choices.

Then, once you’ve looked at your cash flow forecast, you can start to delve deeper into your costs and see which part of your business is performing how it should be and which needs your attention. A good example of this is the conversion rates as leads move through your sales pipeline. Business owners often look at the total conversion number – but rarely break it down by sales person, channel, or conversion between the different stages. And the devil (or the truth) is really in the detail, not in the headline numbers.

If you don’t have the clarity about how your underlying business is doing, you won’t know where to spend your time, what problems to solve, or even how big they actually are.

There may or may not be a horribly scary monster lurking in the woods. You may actually find that you’re worrying a lot about the equivalent of a heavy-footed squirrel! But you need to grab the torch and check it out for yourself – for your own peace of mind and for essential planning for the months to come.

 

If you want an honest conversation about how your business is doing, we’re happy to have a 30 minute call with you to help you get to that truth. Remember: the numbers never lie. So if you want expert input, practical insights and a really commercial approach (rather than simple bean-counting), reach out – and let’s get you the help and support you need for your specific situation.

 

To find out more about how SME owners feel about the future and what actions you should be taking right now download our latest report – Riding the Rollercoaster: Insights from SMEs.