As ONS data reveals just under a quarter of all businesses[i] are unsure about their cash position, Purbeck Insurance Services, the provider of personal guarantee insurance to the owners and directors of UK SMEs, is urging small family businesses impacted by COVID-19, to stress test their finances. Purbeck has also launched a free online guide to the support packages and measures SMEs can consider during the Covid-19 pandemic and beyond.
Todd Davison, MD of Purbeck says: “It is vital that in the midst of so much uncertainty, small businesses have a firm grasp of both their current and future cash position. Use an accountant to help you if necessary. Only by stress testing your finances can you understand the measures you need to take to build your financial resilience.”
Purbeck’s tips for stress testing business finances:
- Look at cashflow and forward project how it might look in 30 days, 60 days and 90 days’ time to help identify any gaps in the working capital position.
- Take a realistic, optimistic and pessimistic view for each of those timelines.
- Consider the failure of a key customer or customers, the possibility of being paid late or the impact of a failure in your supply chain. This will provide a good idea of the business’s financial position in a range of potential scenarios.
- Look at your current ratio – that is your current assets compared to your liabilities which will help you understand your ability to meet short term supplier and HMRC obligations. This would apply if you have low gearing i.e. the low use of external debt such as bank loans.
- f you have slow moving stock you need to look at your liquidity ratio. Liquidity ratios determine a business’s ability to pay off current debt obligations without raising external capital.
- Target ratios of 1:1 or higher. You can even apply your own working capital buffer of, say, 20-25% to these ratios to get to a ratio of 1.25:1 to maintain an adequate level of contingency funding.
- If your business is highly geared, the current/liquidity ratios are important but also consider your debt-service coverage ratios i.e. the operational free cash flow (Earnings before interest, tax, depreciation and amortisation) your business is generating to meet repayment obligations to external debt providers including interest.
Todd Davison concludes: “We know many of our customers have already contacted landlords and current loan providers to arrange a payment holiday to help ease pressure on cashflow. The Government’s support has been crucial but this does have a shelf-life and must be used to sustain businesses rather than help them grow. If you do decide to take out a loan with a personal guarantee attached, make sure this risk is mitigated as far as possible through Personal Guarantee insurance.
“Keep talking to suppliers and customers who are likely to be in the same position. Constructive, transparent dialogue within the supply chain can help manage expectations and identify a collective way forward.”