Managing risk during times of uncertainty

Peter McIntyre, Head of Small Business Banking, at HSBC UK discusses how businesses – particularly SMEs – need to look hard at the ‘ordinary’ things, like risk and cash management, in extraordinary times.

How am I going to pay staff and suppliers when I know my sales and revenue are about to get hit? I have cash to last for the rest of the year, and then what? Will I be able to borrow? Will we lose business because we can’t get our staff across borders or new local lockdowns are introduced?

These are questions that were posed by many of UK’s 5.8 millionsmall and medium-sized businesses that are exposed to the extreme economic conditions caused by the COVID-19 pandemic and they will be considering in the lead up to the end of the Brexit transition period.

With the inevitable knock-on effect of sluggish revenues, tightening liquidity and restrictions on travel, here are some suggestions that SMEs should be considering to manage their risk, liquidity, and cash management approach.

Get the basics of cash management right, and tight

These steps might seem simple, but they are often overlooked. From planning ahead, to evaluating upcoming cash inflows and outflows, being diligent in preparing invoices, monitoring the collection of receivables and ‘actioning’ real-time reconciliation to give a clear and true understanding of the cash position.

Once businesses have this nailed down, they will be in a far better position to make informed decisions on whether they should be borrowing to supplement their working capital.

Use measures to support liquidity

Businesses who, in the past, have had a lot of cash must not be complacent and should consider accessing loans, overdraft extensions and repayment holidays should they need to do so. Commercial credit cards can also be a good tool to manage cash flow, with interest free credit periods, allowing businesses to manage cash flow efficiently.

Have a strong feel for your liquidity, credit, and FX exposure

The current conditions are causing a significant impact on foreign exchange fluctuations, liquidity, and credit availability. There are a few questions worth considering now:

  • What is my liquidity position? In time of headwinds, businesses can be faced with a cash crunch, so it is important to assess if there is enough liquidity over the foreseeable future or if the business needs to borrow or raise capital.
  • If borrowing is necessary, then what will be the future cost of borrowing? Knowing the maturity dates of any existing loans is critical too. If refinancing is required, start those discussions with lenders early to remove the uncertainty over credit availability and its cost.
  • How do I approach my FX positions? Companies may consider making alternative arrangements for themselves or for their suppliers to remain buoyant, such as shifting supply from sales to other countries. This raises the need to understand changes in FX exposure and reassess how the attendant risks are being managed and value protected.

Consider negotiating better terms of trade

Before businesses start trading internationally, they should create financial and sales projections and use them to assess their capital needs. Have adequate financial resources to meet those needs – plus a cushion – before they start. If they are exporting and get a big order but do not have the working capital to finance buying or manufacturing the products, their global expansion might end before it begins.

A company should also look at renegotiating their terms of trade where they are unfavourable. For example where there’s room for negotiation, instead of paying overseas suppliers up front look to propose stage payments, paying a percentage up front, another on evidence of shipment and the balance on 30 day terms might be a solution. This will also provide an element of security.

If you are struggling to trade on the terms demanded by your buyers talk to them – you might be surprised as many big businesses are keen to support their supply chains and are often open to a discussion.

Go digital

The pandemic has pushed many businesses towards a more virtual environment, but it is also revealing how operationally paper-dependent many companies are in areas like payroll, payments, and authorization arrangements. Many of these can and should be shifted to digital and the transition is not as overwhelming as expected – banks are also providing extra resources to help businesses make this transition so do reach out where you can to see what support is available.

In summary, the economic impact of the coronavirus to people and companies will be profound. The questions this pandemic raises for any business are tough – but they’re real and they need to be addressed. Whatever the future is, SMEs who review and manage their risks and have a clear understanding of their working capital and liquidity will be in a stronger position to weather the storm of uncertainty and safeguard their future.

Beware of Fraud

Be extra vigilant in times of uncertainty, fraudsters use a range of sophisticated techniques to trick people into sending them money and often use events, current affairs and busy periods as a way to con investors into parting with money.

Be wary of emails, texts, letters, social media messages or phone calls offering help before, during and after the UK’s departure from the EU. Especially purporting to be HMRC, US Customs and other government agencies. Be cautious of demands for VAT and import tariffs and for fees from shipping and logistics firms etc. Always question uninvited approaches in case it’s a scam. Instead, contact the company directly using a known email or phone number.

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