How do I protect my business? - Plan for the worst

1)    Control the controllables

In times of uncertainty it is paramount for business owners to understand and manage the core fixed and variable costs of the business.  Take a look at your monthly and quarterly outgoings and identify the costs into three categories:

1.    Basic building blocks of existence, rent, rates, bookkeeping, PAYE, electricity, telephone internet, software licences, payroll etc.

2.    Functional Costs, material and goods purchased, travel to site, additional staff, contractors, marketing

3.    Discretionary costs, marketing, training, entertainment, travel, pensions, consultants, research and development, recruitment are examples.

Rebuild your monthly outgoings sorting the costs into these three categories and prioritise the expenditure accordingly.

To control you need to limit the ways in which staff can commit expenditure.  To do this you may need to cause a bottleneck and have all purchasing commitment decisions go through you or your most trusted managers. 

Stick to the plan, analyse the results monthly, quarterly and course correct.

Plan, Do, Check, Act.

2)    Cash flow:

Cash is king, profitable businesses go bust in difficult times because they neglect to plan their cash needs over time.  The risk is that there is a short term cash shortfall and you don’t have the right facility at the bank.  Wasting an enormous amount of your time talking to the bank and irate suppliers which should be developing the sales pipeline. Six step plan:

1.     Build a weekly cash flow from your bank statement, listing direct debits, standing orders, payroll PAYE and VAT, all the must pays.

2.     Add in a weekly payment to suppliers that is a sensible number to maintain a balance between cash constraints and continuous supply of goods and services.  Only pay bills on one day a week I would recommend Friday.  On Friday you know how much cash you have received and what you can afford to pay.  A Note of caution here.  If suppliers put you on hold, you stop delivering, invoicing and collecting cash.

3.     Collections, these can be managed by you or your customers. Active credit control is a great way to maintain consistency of cash flow into the business and done correctly will not upset your clients.  Passive credit control ie waiting for your customers to pay you is unpredictable and in difficult times unlikely. If you don’t ask you are less likely to get paid than someone who does.  Never be afraid to ask for money for work done.  Build in a sensible number for weekly collections based on your outstanding balance, sales run rate and payment terms.  Note cash collected includes VAT, which you hold before paying HMRC.  VAT is not your cash and therefore you need to know how much of your cash balance is yours and how much is VAT.

4.     Your drawings, payroll, dividends, whatever you call it, you will be taking cash out the business to pay your bills.  You must include this and manage it.

5.     Monitor and update the model on a weekly basis, create a checklist of actions to take, suppliers to pay customers to chase for the next seven days.

6.     Communicate with your suppliers, if they know you have a plan they will wait, no communication is perceived as no plan and hence no reasonable expectation of payment.

7.     Repeat weekly

3)   Supply chain:

Due to uncertainty over border congestion caused by additional customs checks and regulations we need to consider the impact on your business of the total supply chain for your products.  Your supply chain goes beyond your relationship with your local supplier it needs to be understood as far back as the source of materials and components.  What if anything is sourced from outside the UK, or is reliant on product from outside the UK?  Do you know?  Does your supplier know?

Understanding your supply chain will identify what issues you need to mitigate against via alternative sourcing, stockpiling or offering an alternative UK based product.  Active management of your product list via supply chain management rather than passive out of stocks and delays.

Equally if you are selling goods and services to the EU do you know the regulations that will be applied under a no deal scenario.  At the minimum you will need an EORI from HMRC, this is a customs identifying code that allows your goods to pass through the ports of entry and exit more easily. 

4)    Pricing strategy:

Once again having a proactive pricing strategy will enable your business to manage any sudden and dramatic fluctuations in inflation and interest rates.

What we know is that the UK is currently demonstrating wage inflation over and above the consumer price index.  We also know that there is low unemployment and therefore demand for staff is equal to or in excess of supply.

In a post no-deal environment it is reasonable to assume that prices for basic goods will increase either because of tariffs under WTO rules or due to reduced supply due to border congestion or other disruption.  Such inflation will put pressure on household income and ultimately drive the need for wage increases. 

In tandem in a post no-deal environment we can assume that sterling is likely to decrease in value vs major currencies leading to cost inflation for products sourced from overseas before tariffs are applied.  This inflation may be severe enough for the fiscal authorities to apply interest rate rises to drive up the value of sterling and reduce inflation. 

An increase in interest rates above 5% would have a significant impact on households again driving wage inflation.

All told prices are more likely to go up than down.  You need to have the analysis showing the levers of cost for your products.  Is it wage driven, commodity driven or a combination of both?  You need to have costings that allow you to know and to implement price increases to your customers before not after you feel the cash effect.

5)   Other things to think about:

1.    Bank account:

1.    Under the FCA rules you are insured for up to £85,000 of cash deposit should your bank go in to administration.  The is across all accounts in total not by account.  It is easy enough to open new accounts for business funds possibly Fintech bank or high street which takes longer.

2.    Currency accounts, should there be a run on sterling it may be sensible to have a foreign currency account say Euros or USD.  This is most easily managed through Fintech bank multi currency account.

3.    As noted above make sure you have financial headroom approved in advance, what we know about bankers is they love giving an umbrella when the sun is shining and want it back when the rain comes.

2.    Mortgages:

1.    If you have a variable rate mortgage you may want to think about looking at a fixed rate deal to protect you against any sudden interest rate swings.  Remembering interest rates can go down as well as up so there is some risk attached.

3.    Regulations:

1.    Is your business governed by any EU legislation or regulation that you rely on to sell or guarantee your products.  This may include CE mark as an example.

4.    Travel:

1.    Remember your passport will need to have a minimum of six months time limit left on it pdf you are to travel to Europe.

2.    If you are driving there is a chance you will need to source a “green card” from your insurer.

3.    There will be longer than normal queues at points of entry so be ready for delays.