COVID-19 Business Management Support for SMEs

I have spent quite a lot of time recently considering what assistance SMEs will need to enable them to survive and prosper in these unprecedented times.

Sure, furlough schemes, rates holidays, the 80% guaranteed business interruption loans and more recently the 100% guaranteed bounce back loans will help. But no matter how soon the Covid-19 problem goes away, plenty of damage has already been done to SMEs. Not just to their balance sheets and their cash but to the stakeholders with whom they must interact to make a profit:  

  • Their customers (and for B2B their customers’ customers too)

  • Their supply chains

  • Their employees and the labour pool from which they draw

  • Their competitors  

Once the bombardment stops and the smoke clears and SMEs see what is still standing in their market and supply chains, that’s when the real work starts; to chart their way forward in a very changed world. That’s when expert external assistance at a more detailed level than just the provision of direct financial support will be needed. I think that the assistance required can be divided into three phases:  

1.     React

2.     Restructure

3.     Rebound

React

The react phase started in early March - it started in earnest when the lockdown was declared. We are still in this phase to an extent, which is all about going into hibernation as fast as is feasible, preserving cash and using the various government schemes to the maximum to preserve as much of the business as possible.

It’s also about negotiating with creditors for as much relief as can be obtained, but equally looking to support customers as much as possible to retain loyalty and help them to stay in business too.

Of course professional advice at this stage is critical, particularly with regard to short term cash management and help in understanding and using the government schemes. I know from conversations with Andrew Jackson and the Fact3 team, SMEs and their advisers that forecasting and re-forecasting and re-re-forecasting(!) is happening as each new iteration of government support and lockdown intentions is announced. Each one of these brings in its wake another “reaction” for companies.

But now, an end to lockdown is foreseeable (even if not immediate). At that point large scale government intervention will have been determined. Arguably, that will come with the final version of the furlough scheme due soon. From then on it will be down to companies to plan their own destinies rather than react to how government is shaping it for them.

I’m calling this next, planning phase “Restructure”. At this point I think that many SMEs are going to need a new type of external assistance – helping them to completely re-think their strategy for what will be a very different world.

Restructure

Faced with considerable uncertainty, businesses may feel that it is pointless doing any detailed planning any time soon. That is the wrong view. The companies that will do best in the future are the ones who have a plan ready to go. Or rather, several plans. This is the time to do some broad and simple “scenario planning”.

Scenario planning is a technique made famous by very large companies such as Shell. These companies use it to imagine different futures and produce outline plans for each, so they are ready to “go” when it becomes clear which future is looking the most likely.

But you don’t need to be Shell to make use of the technique. At its simplest (and most plausible) companies should imagine two scenarios – the first being a relatively swift relaxation of the restrictions and a return to something approximating normal trading conditions within a few months. (Even then, there will be plenty of damage from which to recover)

The second, bleaker future is one in which restrictions are lifted more slowly (maybe they are lifted and the put on again if there is a limited virus comeback), or restrictions are lifted quite soon, but consumers / business customers are scared and conserve cash (there is already some evidence of “scared consumers” in surveys). So in this world, trade remains depressed for much longer.

We can sum up these two scenarios with an imaginary example of a company that sells equipment and supplies to specialist high street businesses – let’s say to food outlets (a mix of take out and restaurant style establishments). What is relevant to our imaginary supplier will be the damage to the market in the two scenarios – and it’s about imagining what happens to its customer’s customers – the end consumer – in the end it’s their actions that will determine how much our company is going to sell. Here’s a pictorial representation:

 

The time axis shows the progression from the start of the lockdown. As time goes by the damage to the market gets worse. The black line represents where we were up to at the end of the initial lockdown. This has now been extended (the blue line) and we don’t yet know how far.  Clearly, the longer things are frozen, the worse it gets.

The colour coding of the damage axis assumes that thus far all customers are intact; damaged, but able to trade when the restrictions are lifted. But the blue line suggests that as the lockdown continues, damage to the market gathers pace and we enter a phase where quite a few customers are in financial distress (of course one can adjust the gradient of the blue line to suit what one thinks will actually be the case).

Then the restrictions lift, but it’s not an immediate return to where we were. Indeed as you’ll see even on the happy green curve, things get worse before they get better. Some customers find that consumers, though coming back in numbers, aren’t coming back soon enough. Creditors who had been patient may now start screaming. Lots of customers are still in the danger zone.

But in the green scenario, things improve quite quickly. The return of the green line to the time axis indicates that the damage done has been restored.

The second, red line, shows what happens when end consumers return much more slowly – it’s the same principle as with the green one but obviously the gradient goes steeper and into the red zone before turning down again. There will be more casualties amongst customers, more damage to the supply chain and competitors are likely to be more aggressive.

So what is the restructure phase all about?

It’s about imagining (in a sensible, not fanciful way) what the futures could be (maybe only the two I suggest) and then identifying what the world will look like for each of the key stakeholders in each scenario. There are a number of questions that the company would need to answer. Here are examples of just a few of them; for instance:

  • Looking at end consumers, who will be buying? Will there be a lot of them or a few? What will they buy and from what sort of outlets?

  • Will our supply chain be intact? And if not completely, what areas will be weak or gone? How might continuity of supply be affected? How might prices for materials look compared with now?

  • What illness disruption might we face amongst our workforce?

  • Amongst our customers, which businesses will be able to pick up more or less where they left off and which will have greater problems (financially, operationally – e.g. staffing, etc)

  • Will all our competitors still be around (not just big ones, but small ones too)? How wounded are they likely to be?

Clearly, quite a bit of research may be required to arrive at reliable answers.

Once the answers are obtained for each scenario then the company can start to think (in overview only) about what it would need to look like to service demand (perhaps including new opportunities) and do so competitively and on a sound financial footing. So an outline strategy for each scenario is needed.  Allied with this the company would need to think about what indicators it should be looking for to help it decide which of the scenarios looks like playing out.

I think it is likely that most companies will need some continuing external expert assistance to facilitate the process I have set out above.

In these exceptional times, I suspect that some businesses that had concerns will emerge from hibernation saddled with significant additional debt (even if some of it has been postponed – such as VAT) and with mortally wounded balance sheets.

This is a paradox – we will have companies that can trade profitably, but won’t be able to continue. It will be like a strong swimmer having a lead weight tied to them. In the end they will drown unless the weight is removed or lightened.

I think we are going to see a lot of CVAs coming out Covid 19 and whilst this will involve insolvency experts, they need to be aided by professionals who can help them envision a viable company that could emerge on the other side of the CVA.

So that’s the restructure phase – companies emerge from it with a viable outline plan. Now they need to rebound.

Rebound

In this phase SMEs start to get going again, either in a substantial way, or in a more “steady as she goes” way, dependent on which of the scenarios (or indeed some hybrid) is playing out.

By being properly prepared at the “restructure” phase, SMEs will be able to recover quite quickly. However, with considerable uncertainty still abounding and speed and agility being of the essence, documenting a major plan is probably not a sensible use of time; and financial projections beyond say the end of 2021 are unlikely to be very meaningful. Only when clarity improves (say by the end of 2020) will developing detailed longer term plans make sense. So in the meantime, the vital steps that SMEs should take are:

  • Identifying from their chosen strategy the set of critical success factors (“CSFs”) impacting their ability to recover and prosper

  • Translating the CSFs into a comprehensive (but succinct) set of dynamic KPIs that tell the company how well they are doing on those critical success factors

Of course, companies that already have a system of managing by predictive indicators, e.g. by using a balanced scorecard approach, will be ahead of the game. They will already be used to tracking the cause and effect drivers of success using this framework:

However, those companies without this head start should still find it possible to identify, define and use appropriate dynamic KPIs. I would expect CSFs to translate into KPIs such as:

  • Forward cash

  • Working capital management/risk in customers

  • Customer retention

  • % perfect transactions and customer satisfaction

  • Pipeline effectiveness

  • Supply chain resilience

  • Cost management (direct and indirect)

  • Workforce strength

The way in which these KPIs are defined, targeted, analysed, discussed and actioned is absolutely critical. It’s very easy to end up measuring incorrectly or driving the wrong behaviours, so again, expert external assistance is likely to be required.

External assistance

I’ve mentioned external assistance several times, but I recognise that for many SMEs the cost of suitably skilled input may be beyond them, especially in hard times. So I am hoping that the government will resurrect the type of grant schemes for this sort of help that were so effective in previous recessions.

Jon Scopes

Jon Scopes is an independent consultant and is currently Deputy President of ICAEW Manchester. He has spent the last 30 years of his career working at board level, mostly with SMEs, to improve financial results through the implementation of effective strategies. He cut his teeth on the grant assisted business improvement schemes of the early 1990s recession and has since worked with all sizes of enterprise from SMEs to multinationals and spanning commercial, not for profit and charities. And he’s done it from the other side of the fence too, as FD of an AIM listed company.

 
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