The uncertainty of post-pandemic growth
February 24, 2021
As the government rolls out its mass vaccination programme as a last resort solution to the Covid crisis, there may finally be hope of some sort of normality at some point in 2021, though whether that moment comes in spring, mid-summer or the autumn remains to be seen.
But whenever the economy begins to climb out of its recessionary hole, one danger above all will face businesses, especially those in the sectors worst hit by the pandemic. It has been true after all recent recessions and it will be so even more so this time round: even gentle growth can kill weakened companies and rapid expansion can carry off even strong ones.
No fat on the bone
The fabric of many businesses has been eaten away as the crisis has dragged. Asset values have shrunk, debts have escalated with government-backed loans and deferred payments to creditors, while losses have decimated resources. Balance sheets are shadows of their former glories and cash flow is ugly.
More sales means more working capital
For almost all business models, as sales grow so do trade debtors and more inventory or work-in-progress needs to be financed. Additional production capacity may be necessary, maybe even more space. The money must come from somewhere, so bank and other funding facilities will get more and more stretched.
Lenders are nervous
Understandably, banks and other financiers, who are seeing their debt provisions rise will be nervous about even maintaining existing facilities for borrowers, never mind increasing them.
Financial information is a problem
The financial data that companies can share with their lenders and other stake holders like credit insurers is either hopelessly out of date, describing trading pre-pandemic; or it covers the wasteland of the crisis with slashed revenues, increased bio-security costs and savaged profitability. Forecasting the future is nigh on impossible, with lockdowns and restrictions changing all the time and uncertainty in every underlying assumption.
Pricing is challenging
Customers want low prices to help their profitability; your business needs fatter margins to survive and to replenish depleted reserves. Which way to go? One thing is for sure, low margin growth is the most dangerous choice of all. The temptation to chase sales may be hard to resist, but there has never been a worse time to be a busy fool.
How safe are your customers?
All these considerations apply every bit as much to your customers as it does to your own business. Ramping up sales to a vulnerable customer is the short road to a bad debt, which would be a disaster. It is a sobering reality that if your profit margin is 10%, a £10,000 bad debt means an extra £100,000 of sales must be generated to offset the financial damage.
Safe growth strategies
There are some vital tasks you must undertake if you expect your activity levels to rise as we emerge from the crisis. Firstly, do the numbers and make sure you thoroughly understand your financial position, warts and all. Cut out any blue skies thinking, be ruthlessly realistic. Next, ensure you get sufficient financial resources in place before you start accepting the extra business. Finally, do your homework about the most up-to-date finances of your customers. Then and only then, accept the new orders and watch your top line grow.
Staying on top of the growth
Once you are ready to go and the sales start rising, keep track of how the expansion is going and keep it firmly under control. Remember the forecasts you did to get the extra resources? Stick to them and avoid getting carried away by this thrilling roller coaster of sudden success. Planning for a 15% revenue hike will soon be blown away if revenue is careering away at 30%.
If you are interested in independent help and guidance on these issues, we will be pleased to assist. Getting an independent expert view of the options often leads to a more productive debate and better decision making. Please contact one of our Partners at your nearest office.