Strategy & Operations » Financial Reporting » Companies must reconsider their cost base and funding sources as coronavirus support schemes end

Companies must reconsider their cost base and funding sources as coronavirus support schemes end

CFOs warned to assess financials and take action to protect their cash flows

As coronavirus business support schemes are unwound, CFOs must reconsider not only their companies’ balance sheet structures but also their business models, according to industry experts.

At the same time, they must take immediate action to safeguard their cash flows against potential future shocks such as higher interest rates, larger tax burdens and inflationary costs.

“Over the past year, corporates have been supported by a stream of government enforced initiatives designed to stabilise and support their businesses during the height of the Covid-19 pandemic,” says Martin Gray, managing director in Kroll’s restructuring advisory practice, identifying government-backed debt products such as the Coronavirus Business Interruption Loan Scheme (CBILS),Coronavirus Large Business Interruption Loan Scheme (CLBILS) and Bounce Back Loans Scheme (BBLS) as key support measures.

“This has ultimately led to a substantial increase in the level of liabilities on companies’ balance sheets. All of this must be repaid by businesses over a relatively short period of time and at a point when there remains an inherent level of uncertainty over the outlook of the market.”

He concludes that companies must now complete a critical assessment of their businesses to ensure financial stability.

“We must acknowledge that the UK’s business debt burden has ballooned to unprecedented levels,” says Douglas Grant, managing director of Conister Bank. “Unfortunately this has already created a relentless flow of weak, zombie-like companies falling off a loan default cliff-edge.”

Meanwhile, Rebecca Thornley-Gibson, partner at law firm DMH Stallard, warns that many companies now must consider the implications of the Coronavirus Job Retention Scheme coming to an end on September 30.

“Companies will have mixed feelings as they say farewell to furlough. Many employers used the financial lifeline and retained employees who are now fully utilised, but for those employers who have realised they don’t need the same pre-pandemic number of employees, hard choices will have to be made,” says Thornley-Gibson.

“If redundancy is the last resort, the timing of the redundancies and the financial planning for exit payments need to be considered.”

Cost controls

There are several measures CFOs should be pursuing to strengthen their company’s finances and balance sheets and emerge from the pandemic on a strong footing.

These include reassessing their company’s cost base and ensuring it is based on current demand.

Adrian Burrows, director of finance at Best Western Hotels Group, points out that one of the easiest things for most companies to do is cut their costs of operation.

“Clearly a lot depends on the market you are in and how quickly you can recover,” says Burrows. “A lot of companies have slimmed down their organisation as a result of the pandemic to cut their cost base.

“The furlough scheme worked very well for us in terms of retaining our staff, but we did have to make some difficult decisions last year,” he adds. “We are now a slimmer organisation.”

Burrows points out that access to government support schemes during the pandemic provided the hotel group with a safety net during difficult times, enabling it to get back to trading.

“We accessed funding loans through the government-backed CLBILS when the pandemic started as it was very difficult to see what would happen,” says Burrows. “Our income stream had dried up and this provided contingency against difficulties. There was no interest charged for the first 12 months, so we considered the risk very low.”

He adds that the six-year timeframe allowed to pay back the loans has proved advantageous as well.

“The scheme allows plenty of time for companies to get back up and running,” he adds. “This was a particularly well thought-through policy that has enabled a lot of businesses to keep on trading.”

Funding and support

As government-backed support schemes end, CFOs also must ensure that their companies have sufficient access to other sources of funding to support their businesses and deal with potential near-term shocks. Where necessary, CFOs should also consider restructuring their capital base.

“Today companies must look to ensure they have access to the funding needed to allow them to trade in the current climate on a sure footing,” says Burrows. “If need be, they should go back to their banks to discuss this.”

“There are a number of other challenges that businesses – especially in our sector – now face including labour shortages and the rising cost of utility and gas bills. Hotels have also been hit by the lack of HGV lorry drivers in terms of food deliveries, as well as other third-party providers such as linen services,” he continues.

“The increase in National Insurance Contributions adds another cost burden on both employers and their employees and is not welcome by many businesses. It could bring extra pain as we come out of the pandemic,” he says, noting that there is an expectation that things could get harder in the short-term.

Capital structure

Burrows points out that companies should also consider adjusting their capital structure.

Kroll’s Gray agrees: “It is critical that corporates maintain regular communication with their key stakeholders to ensure they all remain informed and supportive of the direction being taken.”

However, he notes that liabilities may have disproportionately increased to a point where the level of support from stakeholders has been maximised.

“Where necessary, companies should consider the options available to restructure their balance sheet to become more aligned to the cash flow needs of the business,” says Gray. “This may include reducing or normalising their current liabilities with a more manageable longer-term debt solution.

“This could be possible through traditional sources of finance and/or a recapitalisation through equity means.”

He points out that the Government’s Recovery Loan Scheme (RLS), which does not end until the end of the 2021, also presents companies with the option of up to £30m worth of funding support across a group.

“This is designed to help businesses of any size to grow and recover from the disruption of the pandemic. The use of these proceeds can include cash flow management, growth, and investment,” he says.

“We also believe that the introduction of the RLS will act as second support system for those businesses currently struggling but with long-term growth potential,” adds Conister’s Grant. “The Government has looked beyond the obviously more resilient business sectors and introduced the RLS to support those businesses that have been mostly negatively impacted by Covid-19, such as the hospitality and leisure sectors.”

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