A good time for a financial and commercial health check?

A good time for a financial and commercial health check?

February 11, 2021

As we approach the first anniversary of the start of the Coronavirus crisis, few businesses have been left unmarked by the most extraordinary twelve months in living commercial memory. The degree to which they have been affected is determined by the industry in which they operate and their positioning within that sector.

For most owners and managers, it has been an extraordinary roller coaster as rules, regulations and restrictions have come, gone and been flexed with bewildering speed. Their staff, customer base, supply chain and key stakeholders have been through just the same manic change-management challenges.

Few have had the luxury of standing back and taking stock of their financial position, but never has this been a more important item for a priority list than now, as the vaccine rollout offers the first tantalising glimpses of a post-pandemic world.  There are a series of vital questions that need asking and answering sooner rather than later.

1. Does the business model still work?

Just because a business has survived this far, does not mean that its business model is still relevant, even if it has been given an emergency tweak to keep the company alive. A classic example can be seen in retail, where many predominantly bricks and mortar offerings have moved online at pace. This may have saved some sales and helped turn stock into cash, but will it be profitable in future if consumers really do want to stay with internet shopping even when stores can re-open and mask-induced, fogged-up glasses have become just a bad memory?

Town and city centre restaurants have worked miracles creating cook-at-home kits, but if working from home or if hybrid home and office use is the future, do they still need such large premises and are they in the right location?

2. Can the business ever repay the debts it has built up?

Bounce Back Loans, VAT deferrals, rent enforcement bans, pension contribution holidays – these measures have all helped businesses get through the year from hell, but these liabilities have not gone away and eventually there will be a day of cash flow reckoning. It is important to have a plan to deal with this or these debts may overwhelm even a profitable enterprise as they start to crystallise.

3. Are assets still worth what they were before the pandemic?

The crisis has wreaked havoc with valuations, especially those related to freehold and leasehold commercial property and particularly where trading at some premises is no longer as profitable as before. Intangible assets such as brand or goodwill values have also affected by changes in viability. Chattel assets like fixtures and fittings or capitalised refurbishment costs sitting in the balance sheet with a four-year depreciation policy may need writing off immediately or more quickly.

This is not just an arcane accounting issue, banking arrangements may contain covenants such as maximum loan-to-value or gearing limits that a shrunken balance sheet or bloated liabilities mean can no longer be satisfied.

4. Is the business still profitable enough?

This is a different consideration to whether a business model still works at all, this is about how much profit and cash it can generate because this too may affect funding arrangements, on aspects such as interest cover covenants. A more philosophical but equally important question is whether the risk in the business is still worth the reward.

5. Is the company still solvent?

Wrongful trading penalties may have been put into temporary hibernation, but that is no excuse to continue with a business, which will never be able to pay its debts, especially if there are personal guarantees involved.

6. Are borrowing facilities still reliable?

Every recession makes lenders more cautious, both in terms of the extent of the risk they can tolerate and the price of their support. In some of the worst hit sectors, banks and other funders have understandably been running for cover now for months. It is vital to have an adult conversation with finance sources about where the business is financially and where it is going commercially, so that their continued support can be assured or so that alternative arrangements can be made where necessary.

7. How secure is the supply chain?

As well as the ravages of the pandemic, we now have significant international trade disruption from the aftermath of Brexit. There needs to be an urgent supply chain review, involving the identification of alternative sources where these might be needed.

8. How solid is the customer base?

The next few months is going to be brutal, as the plethora of government support measures start to be wound down and insolvencies inevitably begin to proliferate. Whatever the assessment of the financial health of key customers and the credit limits set for them, these must be based on the most current information, not on historic accounts and certainly not on the emotion that can sometimes creep into long term trading relationships.

9. Creating a realistic set of forecasts

Almost none of these questions can be answered without preparing a detailed set of forecasts based on realistic assumptions, starting from an honest opening financial position. This is no time for blue skies budgeting.

10. Creating an action plan

Asking some of these questions will prompt actions, steps to deal with any problems that are identified. These will need turning into an action plan with a timetable and a proper allocation and delegation of tasks, which then needs to be shared around the management team and other key influencers within the business to fill any gaps, correct any misapprehensions and secure broad scale buy in.

Is outside help needed to review the business?

Good luck to those businesses with the capacity to conduct this sort of root and branch business analysis by themselves in the midst of the tough times we are all facing right now. Even so, there is nothing quite like an independent view and the rigour of an external voice challenging those long-held assumptions.

If you would like to discuss an independent business review for a client or for your business, please contact one of our Partners at your nearest office.