Written by Hasib Howlader
There is a lot of uncertainty at the moment for businesses all across the UK, but in particular, for SMEs who may not have a sufficient cash flow to get them through this turbulent time. Covid-19 will have severe consequences for SMEs, with a prolonged effect on the spending of products and services.
So, how can these businesses plan to stay afloat during this slump in sales and a reduction in cash flow? Here is an accountant’s guide for tech SMEs in the post-Covid economy.
Loans and Finance Support
The Government has acted, and there are a number of schemes and payment deferments designed to help financially support small businesses during this time.
Quarterly VAT payments take a considerable proportion of cash from many UK businesses. The Government has since allowed businesses to defer these VAT payments that are due from March to June 2020, to be delayed by a year – with no interest or penalties. The deferment is automatically granted to all businesses, but they must cancel their direct debit to HMRC for VAT payments.
Additionally, businesses are still required to submit VAT returns for compliance even under the deferment. Please see the official government guidelines for more information.
Coronavirus Business Interruption Loan Scheme (CBILS)
The CBILS helps SMEs access loans and other kinds of finance to tide them over during this time. The scheme is delivered by the British Business Bank.
The Government will provide lenders with a guarantee of 80% on each loan (subject to a per-lender cap on claims) that gives lenders the further confidence to continue providing finance to SMEs. Neither businesses or banks will be charged for this guarantee, and the scheme will support loans of up to £5 million in value.
Any interest on the loans will be tax-free for 12 months. Businesses can put in an application through their bank, using the list on the British Business Bank website.
Self-Assessment Second Instalment Extended
The second instalment for the advance tax for the income tax due for the year end 5th of April 2020 will be due on 31stof July 2020. However, HMRC has extended the deadline to Jan 2021. However, as a business owner, you must decide if it is a good idea to take this deferral as you might have to pay much higher tax in Jan 2021 as the other instalment will be due then.
HMRC Time to Pay Scheme
The HMRC Time to Pay Service allows businesses and individuals to pay off their debt in instalments over a period of time, and the first payment can be delayed up to three months.
For this scheme, a business is eligible if they pay tax to the UK government and have outstanding tax liabilities.
If you have missed a tax payment or are likely to miss your next one due to the impact of Covid-19, you should call the HMRC’s helpline on 0800 024 1222. For concerns about a future payment, call the helpline as soon as possible before the payment deadline.
Bounce Back Loans
Bounce Back Loans are smaller loans that allow SMEs to borrow between £2,000 and up to 25% of their turnover, with a maximum loan of £50,000. They are an unsecured loan, and a personal guarantee is not required.
The Government guarantees 100% of the loan, and there is no fee or interest rate for the first 12 months, after 12 months, the interest rate is 2.5% a year. However, your business cannot apply if you are already claiming under CBILS. But if you claimed a loan of up to £50,000 from a different scheme, you can transfer it to the Bounce Back Loan Scheme – the deadline for arranging this with your lender is 4th of November 2020.
The borrower is liable for loan repayments. In the event of a default, the Government’s 100% guarantee only applies after the lender has followed due process against the borrower. Banks offering the Bounce Back Loan Scheme include Santander, NatWest, Barclays, Royal Bank of Scotland and Lloyds Bank.
Government Support and Grants
Job Retention Scheme
The Government’s flagship furlough scheme is designed to prevent mass layoffs of UK staff. Employees furloughed for at least three weeks are eligible to a grant of up to 80% of their wages subject to £2,500/month cap.
Statutory Sick Pay Relief Package for SMEs
UK Businesses which are small or medium sized with fewer than 250 employees as of the 28th of February 2020 are eligible. Up to 2 weeks SSP is reclaimable from the first day of leave.
Small Business Grant Scheme
This is designed to provide additional relief to small businesses who are currently paying little or no business rates. The relief is automatic, and your local authority will contact you if you are eligible for a one-off grant of up to £10k.
Retail and Hospitality Grant Scheme
Properties that will benefit from the relief are those occupied hereditaments that are wholly or mainly used as shops, restaurants, cafes, drinking establishments, cinemas and live music venues, for assembly and leisure or as hotels, guest and boarding premises and self-catering accommodation.
The scheme provides businesses in retail, hospitality and leisure sectors with a cash grant of up to £25k per property.
Businesses with a rateable value of under £15k will receive a grant of £10k. Businesses with a rateable value between £15,001 and £51,000 will receive a grant of £25k.
You do not need to do anything. Local authorities will write to you if you are eligible.
Cash Flow forecast
Preparing and managing cash flow forecasts will be one of the most crucial elements required by all the businesses, particularly SMEs, to survive this crisis.
As many businesses are looking for loans and finance from banks and other lenders, cash flow forecast is one of the most important documents required. The significant elements of cash flow forecast are cash inflow and cash outflow management.
Cash inflow for most of the business is the sales revenue that they earn. However, for many companies now their revenue streams have either decreased or disappeared, so businesses need new cash inflow streams to survive.
These could include the loans, grants and subsidies. Businesses should have enough inflow to manage their outflow without selling any of their non-current assets. Some small businesses might be disincentivised to take loans, assuming they will end up paying more. Still, they must overcome this mindset; there are loans available in the market such as the Bounce Back Loan which is interest-free and 100% backed up by the Government.
Arranging an affordable overdraft also might provide you with some time to manage your receipts.
Businesses could seek to extend their credit terms with suppliers and provide cash discounts to debtors to receive cash quicker. Early settlement discounts could be offered to customers on current sales.
Next, businesses must minimise their cash outflow.
Differing the tax bills will help, and they should also arrange longer credit terms with suppliers. Businesses should aim to reduce both fixed and variable cost.
Fixed cost that can be reduced by:
- Applying for mortgage holidays
- Payment holidays for finance/HP agreements
- Discussing rent freeze with landlords, or even considering downsizing the office as staff work from home.
Variable cost can be reduced by:
- Discussing with staff about voluntary redundancy or pay cuts or reduced hours.
- Falling electricity and utility bills. If not the case, then businesses should renegotiate with providers.
Business Survival and Opportunities
To create the best business survival strategy, you should first assess your business’s current position by doing the following:
- Update the current budget forecasts to account for the anticipated change in revenue/expenses.
- Update your cash flow statement.
- Calculate if your business is sustainable and if not, how quickly you will run out of cash.
Once you have assessed whether you are in a strong or weak position, you can determine a path forward.
If you are in a weak position, you need to focus on your strengths. This means prioritising the core revenue/profit-making activities of the business. The current expansion plans need to be shelved, and new non-essential hires delayed.
If you are in a strong position, it’s time to consider expansion plans. Be aware of your competition and how they are performing. If your current competitors are having to curtail operations and withdraw from the market, then you should be focusing on gaining market share. You should also be considering takeover/merger opportunities. Redundancies at other firms may also create new hire opportunities.
Review your brand image/advertising method. Successful businesses will adapt quickly to the changing environment. Are you still going ahead with advertisements on the transport system, or do you need to change to online marketing? Should you be focusing on price differentiation, or are your customer base now looking for lower-cost options? Your advertisement strategy will be subject to your target audience, so you need to consider your audience has been affected by COVID-19.
Once you have a plan of action, you can work out an efficient strategy to get your business through this challenging time, and a chartered accountant can help you with expert advice.
Hasib is a Chartered Accountant and a Chartered Tax Adviser with over 15 years’ experience. He formerly worked at both UBS (as a corporate bond originator) and PricewaterhouseCoopers (in the Tax department) before taking control of Howlader & Co, where he has overseen exceptional growth over a sustained period over several years.