So you’re a small business owner in the midst of the biggest health crisis the world has ever seen. You know it’s going to be bad for business, but not sure if there is anything you can do to insulate your business from the impending shock. Right now, we’re in a 21-day lockdown, but Tsepo Headbush, CEO of SME lender Bright On Capital thinks we’ll see at least an additional 14 days after the 16th April 2020. Here’s what he thinks SME’s should do to prepare their businesses for when the lockdown is over:
Prepare for the worst by managing your cash flows
Your turnover is going to be lower for several months to come, which means that there will be less cash available to keep your business running. Your balance sheet won’t look as good which makes you seem more of a risk to banks. Your working capital (the cash you need to pay for things in your business, like salaries and rent) will be much lower, and you might not have enough to cover your costs. Be realistic about the fact that there will be less cash coming in during the next few months, and that it could be a while until this improves.
Take action now
Start looking at what the effect of the lockdown will have on your operations. Will you be able to keep all the staff you’ve got? Can you still afford your business premises? Is it time to cut costs for things that you can do without? Go back to the cash flow budget that you normally use, and adjust it to reflect lower turnover for the next 6-12 months. Think about all the different scenarios that could affect your business as a result of an extended lockdown. Play around with numbers and find a balance that reflects the new normal.
Position your business and balance sheet now for the new reality by doing these three things: defend against turnover decline, stabilise your operations and preserve cash.
Defend against turnover decline
Customer Engagement: Take a look at your sales pipeline and prioritise delivery for orders or sales that are near completion. Get in touch with all your customers, especially key customers, and reassure them about your businesses continuity. Let them know how your business will manage the lockdown, as well as what you plan to do after lockdown. Make sure you’ve thought about the impact of the lockdown on your orders and sales, not only for the 21-day lockdown period, but also the impact in the event that the lockdown is extended. Have a plan for what your business needs to do in the weeks after the lockdown ends.
Customer Sustainability: Assess the impact of the lockdown on your customers. Is there a chance that some of them could go out of business? Are you at risk of not being paid by any of them? Are you able to work together with them now, in order to ensure you both survive in the long term? For customers that are at a high risk of not having enough cash in the near future, request a deposit or negotiate cash-on-delivery. For the rest of your customers, you should consider debtor credit insurance particularly on your mid-sized corporate and public sector companies. Most large insurance companies offer this kind of insurance for small businesses.
Effect on suppliers: Work out the effect that the lockdown will have on your industry. You can certainly expect your supplier’s operations to be disrupted, which means that they won’t be able to fulfil your order in the normal timelines. Some of them could even go out of business, in which case you may have a hard time procuring the goods you need to keep your own business going. Contact your key suppliers to find out the impact of lockdown on their ability to deliver on time. Work out how much stock and materials you’ll need over the next few weeks to cover any delays in delivery. It’s also a good idea to look around for potential alternative suppliers who may be able to help if your usual supplier isn’t able to.
Effect on business capacity: Make sure that you’ve thought through all the things that could affect how much you’re able to do after the lockdown. An impact on turnover will certainly have an impact on whether your business can operate at the level it did before the lockdown. You should think about your business’s ability to execute and deliver in terms of availability of staff, access to work facilities (premises or factory), the availability of logistics or any restrictions that could be imposed on your own logistics and the ability of your clients to receive goods.
There is no doubt that there will be an impact on your cash flow. Even if orders are placed by your customers and sales are made, your business may not be able to fulfil those orders as a result of less cash coming in but still having to pay for salaries, rent, loan repayments etc. Having less cash coming in, but the normal amount of cash going out means that your ‘cash-burn’ rate will be much higher than usual. What are you going to do if and when you run out of cash, or no longer have any cash reserves?
Here are three things SMME’s can do in this situation:
For the current 21-lockdown, talk to your debtors and make sure that they pay your invoices on time. Reconsider your payment terms, and think about switching to COD (rather than extending 30-day payment terms) or request an upfront deposit before going ahead with a customer’s order. Use up your existing stock instead of buying more. Ask your creditors for extended payment terms. For example, if you usually pay your suppliers in 30 days, ask for 90 days. Don’t spend any money on major capital expenses, like buying a new truck. Rather wait a few months to see how your turnover is doing, and see if it makes sense then. Try and negotiate payment holidays (or moratoriums) on loan repayments. Several lenders are implementing more flexible loan repayment terms to help small businesses survive the next few months.
Plan for an extended lockdown. Although the current lockdown measures are working, it is highly likely that the lockdown will be extended. Have you thought about the implications of an extended lockdown for your business? In this scenario, you should have a plan to ‘break glass’ – this comes from the words you see on the back of every bus or taxi: “In an emergency, break glass”. When the time comes, you should know what you’re going to do should the worst case happen. Start by asking your landlord for a payment holiday (moratorium), especially if you have not been able to access your workplace premises because of the lockdown. Talk to your employees about the impact of the lockdown, specifically, whether your business can afford to keep all its staff if cash isn’t coming in. You could offer staff the option of working fewer hours because business is much slower than usual. You could also consider placing staff on unpaid leave for the duration of the extended lockdown, and seeking relief from the UIF Temporary Employer / Employee Relief Scheme. There are several other government support resources in place, so make sure you research all the options available to you. A good place to start is the South African Government’s website for additional support measures for small businesses as a result of the coronavirus pandemic.
Secure a funding facility. Don’t wait until after lockdown to apply for working capital or other funding. Get all your paperwork ready now, and apply as soon as possible so that the cash is ready when you need it. You might need extra cash to pay salaries at the end of April, even though there’s been very little turnover in April. Get that facility approved now, so that you’re ready for payday if you need it.
Bright On Capital is a niche financial services company that helps small businesses finance their working capital needs. We finance businesses that have potential. So if the bank has rejected you, come talk to us. We are here to drive enterprise supplier development and are passionate about helping other black-owned businesses. If you’ve done the deal but need working capital to finance it, we can help you. Visit our website today and apply for a working capital loan.
If you have 12-months trading history, annual revenues of R500 000 or more and supply corporate or public sector entities, then you are eligible to apply for a 12-month revolving working capital facility and have immediate access to invoice finance, purchase order finance and contract finance. Find out more about our Working Capital Finance.