Relax? Don’t do it !
It’s still early days but the first steps have been taken to release us from lockdown. Ok, there will be some fluctuations moving forwards and the timescale is uncertain but surely now the dark times are starting to lighten?
Well, not exactly.
Certainly, I hope that we are now moving into a period where more and more businesses are able to re-open – which will be a major relief to them. But I do want to interject a note of warning.
The point at which things improve is not the time to relax but, in fact, to increase vigilance.
There will be a number of industries that are suddenly going to see a massive increase in demand. New Zealand, for example, saw people queuing through the night in order to get their hair cut on the first day out of lockdown.
For those businesses, if they’ve maintained contact with their clients and kept their profile high during the lockdown, then all their marketing efforts will suddenly start paying dividends. Selling will feel like pushing against an open door in comparison.
But, after such an intense period of ‘surviving’, how will they actually cope when it gets busy?
The phrase “pushing against an open door” is generally used to signify that something is easy. But think about it in reality. When you do push hard against an open door (especially one that has been a bit stiff and suddenly comes free), you are just as likely to end up flat on your face.
This is why we always see insolvencies increase as we come out of a financial downturn.
The main reason is usually down to the fact that growth needs funding. Where will that money come from? Many companies will have taken the government up on the support offered during the lockdown period, but that will have to be paid back. How will that be achieved?
The incredibly low interest rates are currently giving a false representation of debt levels in companies which will be a major problem should rates rise at any point.
And, of course, there’s the question of capacity. How will people cope with a sudden increase in orders?
You might think it’s tough getting a new customer. But that’s nothing compared to getting someone back after you’ve just screwed up their order. More and more, we will meet businesses struggling to meet demand.
We’ve still got some time to go before they properly ‘relax’ lockdown but, when they do, it is vitally important that businesses themselves don’t relax. Consequently, as their financial adviser, you should be getting them to think ahead and make changes now – in order to be ready for the increases when they come.
Consider the following questions.
What is the maximum amount of demand they can actually fulfill (both practically and financially) for a given period?
Would their suppliers be able to meet any significant increases in orders?
Would they be prepared to say “No” to a big order, if accepting it meant over-stretching themselves?
What changes might they see in margins and the cashflow cycle?
What scope do they have to increase prices or improve payment terms from existing clients, should it be needed?
Who in their team was already working at or beyond capacity?
How long will it take to get someone recruited and trained to fill any overcapacity issues?
Which of their costs are likely to go up as the recovery takes effect?
Where would the bottlenecks arise between sales and delivery, if things got busier?
Anyone who can answer all these questions now without any concerns or fears are going to be able to find their way back to profitability without any difficulty.
Everyone else will need their accountant’s help before it’s too late.
By Andrew Miller – AVN PGE
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