Effective financial planning during COVID-19

25 June 2020

As the world has changed drastically from how we once knew it, there’s no telling what changes will continue onto the other side of the pandemic and how long it will take to get back to what we once considered ‘normality’.

As a result of this uncertainty, there’s little that we can control when it comes to external factors and the economy, but there are things we can manage within our own businesses. During the Coronavirus pandemic, there is a distinct need for quality financial planning in order to maintain cash flow and avoid getting caught short or missing out on Government-led low-interest loan opportunities.


Plan for the worst, expect the best

In terms of the impact of COVID-19, it’s impossible to say how fast things will move as lockdown eases further and whether the speculated ‘second wave’ could prove the final nail for many SME businesses without forward planning. Some brokerages throughout this initial period have seen their income drop by up to 70% and didn’t have the budgets in place to account for such a sudden decline.

Most brokerages should have at least a simple budget of what they expect their income to be in the next financial year including their costs and profitability and these will flow into what is called a ‘cash flow model’. In order to plan and adapt accordingly, it’s important to review the impact of your revenue line in decreasing increments, from 5%, 10%, 25%, 35% and so on, in order to explore how this would affect your business including income line commissions, fees and premium finance income. At what stage would your business need to make changes? How significant would these changes be? And what’s the maximum drop your business would survive?

In each of these scenarios, you will need to consider how your business will manage costs accordingly dependent on what each scenario looks like. This will include having conversations with staff to manage and reduce costs, looking at areas such as travel expenses and nonessential areas of expenditure.

You may also need to manage the expectations of your staff in terms of salary and the possibility of redundancies. There’s a chance your staff will take a short-term decrease in salary in order to prevent redundancies across the business. With the right planning and communication in place, you will be able to retain employee performance and morale despite a temporary lack of financial incentive.


Establishing cash flow

At this moment, cash flow is critical, yet many brokers don’t necessarily have that in place and don’t necessarily have an idea of what this would typically be across a 12-month period. The reason behind this is because, usually, cash flow is not a primary concern for brokers.

As a result of the ongoing crisis and resulting economic impact, brokerages need to start planning cash flow now, with the same urgency as if it was going to dry up in a fortnight’s time. This will encourage you to take action with the pace and necessity that is essential at this moment in time. Consider whether you need to furlough employees and explore if your brokerage could take advantage of the current Government-led grants available or request a delay or extension in areas such as corporation tax. These options will not be around forever and if you leave if too late, they could disappear.

It’s also worth speaking to your bank to determine whether you can get a holiday on rent, loans or mortgage costs. Explore every line of spending that your business incurs and consider what you can do to preserve that cash flow in order to protect your business should it get hit hard further down the line. As previously mentioned, nobody knows how long the impact of this pandemic will last but by adopting this approach and ensuring that there is cash flow available when you need it, this will put you in better stead for future.


Reinforcing cash flow

After you have worked through the possible scenarios and it looks like your business will run out of cash in the next 3-4 months, you should speak to your bank now. The facilities available off the back of COVID-19 could evaporate and even if they’re still available, there could be a delay in getting the funds through.

Overall, preparation and cash flow are key for business retention during these testing times. Use the facilities that you have available to you and remain open with your staff, lenders and any investors, shareholders and so on. With careful scenario planning, stringent budgeting and open conversations, you will be in a stronger position once the economy steadies once again.

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