How to survive a crisis as a small business owner

Tim Vine, Head of Credit Intelligence at Dun & Bradstreet, provides tips on how UK SMEs – that now face unprecedented operational and cash flow issues – can look to stay afloat in turbulent times

The coronavirus pandemic has forced many countries into lockdown; with the majority of businesses facing significant challenges and threats to their survival. Many small and medium-sized enterprises (SMEs) – which make up 99% of the UK’s private business landscape – now face unprecedented operational and cash flow issues.

In this period of economic uncertainty, SMEs are having to make key and potentially life-changing business decisions to survive. And keeping them afloat in turbulent times should be a key priority for not just the Government, but also the wider business community and society as a whole.

The current picture

The latest Office for National Statistics (ONS) figures found that GDP fell by 19.8% in the second quarter of 2020, which has now been confirmed as the largest decline on record. And, as a result, access to finance and government-backed support will be critical to SME recovery and future prosperity.

Prior to the coronavirus outbreak, towards the end of last year, Dun & Bradstreet surveyed SMEs and found they were owed an average of nearly £75,000 at any one time in the last 12 months. Furthermore, over a third (34%) said the timeliness of payments from customers had an impact on their future financial success.

To add to the current pressure, our recent payments performance data found that, after several quarters of improvements pre-coronavirus, every industry tracked has seen a fall in the percentage of bills paid on time between March and August 2020. Unfortunately, it’s expected that B2B payment performance will also continue to deteriorate. And SMEs need to be prepared to mitigate the significant knock-on impact. 

Cash flow management

Cash flow management is fundamental to a business’ ability to minimise financial risk. Effective cash flow management helps to ensure a business can meet payroll, rent, and other overhead costs and develop contingency plans in the event of a crisis.

Businesses that fail to manage cash flow may find themselves unable to access the necessary funds required to operate. But despite the extraordinary circumstances, businesses are currently facing it is still possible to assess the level of risk and reduce impact by having a full view and understanding of its cash flow.

One component of cash flow management that many professionals find valuable is the effective use of business data and analytics to evaluate risks. Greater access to the right data makes it easier for SMEs to check the creditworthiness and weigh up the positive and negative factors of a potential customer.

Future-proofing your finances

Prior to the coronavirus, late payments were the biggest pressure on cash flow and the financial stability of small businesses, putting their business at risk of failure according to our study. But now, businesses across the UK are facing immense pressure even without the added strain of late payments.

In fact, almost two-thirds of small businesses (62%) have been subject to late or frozen payments during the pandemic. However, with access to the right data – SMEs can protect themselves – by understanding the previous payment behaviour of customers and potential customers to mitigate the impact on their cash flow. 

Keeping connected

Retaining customers and understanding their potentially changing needs is key. Now, more than ever is the time to have open discussions with customers and suppliers to understand how all parties can work together for mutual benefit and survival and identify opportunities to work in new ways, and with different partners.

If a supplier is able to, for instance, waive late fees on accounts past the 90 days deadline, this could help relieve a lot of cash flow pressure and establish a positive working relationship. Knowing about additional requirements or changes to operation during the lockdown can also help partners manage their own business arrangements and minimise further impact across a heavily interconnected network.

How data can help

Many businesses already look at data on past payment performance to help assess creditworthiness before taking on a new customer, where they have the luxury of choice. In today’s climate, considering supply chain data is just as important. It’s not enough to know the financial strength of a customer alone; SMEs now need to know the financial health of all their suppliers and their suppliers’ suppliers.

Understanding a customers’ financial and supply chain position will allow businesses to better manage the relationship and current pressure. Performing ongoing portfolio management – something that would normally be overlooked when times are good – could be an essential tool in the race for survival. Ultimately, SMEs need to be prepared for any additional unforeseen circumstances that require business readiness.

When making decisions that impact cash flow, your plan is only as good as the data. It’s imperative that the business information being referenced is up-to-date and accurate. And managing risk requires stakeholders to be aware of new developments that could threaten cash flow.

Access to finance

It’s also important for businesses seeking financial support to have a clear picture of their credit file, which will be used by those evaluating loan applications. Commercial lenders are likely to be cautious in the current climate and trying to protect their business as much as anyone else.

SMEs can use data and analytics to understand how their credit score is determined and identify ways they can improve it. By accessing the same information available to lenders, small business leaders can ensure that they’re more likely to receive access to finance and supercharge their recovery.

Having a well thought out and accurate plan will demonstrate how businesses can weather the current storm and ultimately pay them back. Being upfront with what terms can be managed, how any money will be used, and how it is expected to be repaid will go a long way to building trust with a potential lender.

Community

With budgets tight and payments slow (even coming to a standstill in some cases) working together to support each other as individuals and as businesses will be hugely important to a successful recovery.

Having greater transparency and access to information will be key to understanding changing customer requirements, the impact on supply chains and assessing the risk of important decisions that will affect cash flow and ultimately, survival.