Published: Jul 22, 2020
Focus:
Insights
Part II of a series of three articles looking at the impact COVID-19 has had on the UK economy and more specifically how it has affected the SME sector and the likely impact it will have over the short, medium and long term. Mike Collis, Andrew Symmonds and Karen De Meza set out to analyse the immediate actions taken by businesses following lockdown, the challenges that lie ahead, and the actions they may need to consider to protect shareholder value and become more resilient to crises which may occur in the future.
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The past few months has seen business leaders having to react swiftly and decisively to mitigate the impact of COVID-19. Whilst it is understandable that these emergency actions have consumed their attention to date, the progress the UK has made in managing the virus, and the subsequent easing of lockdown restrictions, is a sign that focus will shift from response to recovery. Andrew Symmonds, Investment Director at Maven, assesses the short to medium term impact that the fight against the coronavirus will have on British business.
Following the Government’s announcement of the winding down of the Job Retention Scheme (JRS), together with the recent downgrading of the COVID-19 alert level from 4 to 3, companies can turn their attention to begin trading in the ‘new normal’ World and hope that the coronavirus remains in retreat in order to sustain their recovery. The tentative transition from response to recovery has begun. The retail sector has started trading, albeit operating at reduced capacity, and schools have started to open, enabling large parts of the workforce to be able to return to normal working patterns. The reduction of the two metre distancing rule will also allow other parts of the economy to be able to reopen. A much-publicised example of this is the hospitality sector, which in 2018 was the UK’s 4th largest employer, providing 3.2 million direct and 2.8 million indirect jobs. The sector also contributed £130 billion of economic activity and £39 billion of UK taxation, and will now be able to trade on a restricted basis through its most lucrative period of the year, providing many seasonal job opportunities.
Whilst these changes will undoubtedly lift the mood of the nation in the short term and provide a much-needed boost to the economy, the key question is whether the relaxation of restrictions will be enough to prevent a sustained period of widespread unemployment and a long recession? It is now that the medium-term impact of COVID-19 will start to become a reality and businesses may have to adapt further in order to survive.
Supply chains will have been disrupted, customers lost and some sectors changed forever. Experience will probably prove that the decisions taken at the start of lockdown were easier to make than those which need to be taken now. For many businesses their employees will either have been working from home, or working in their normal environment but adhering to social distance rules, or on furlough.
A large number of employers, most notably from the software, tech and social media sectors, have announced that staff will work from home for the foreseeable future. Whist it may be appropriate for some organisations it is difficult to see how it would work with some small and medium sized enterprises where, in many cases, the camaraderie, nimbleness and flexibility of close-knit teams enables growth, productivity and profitability. Only time will tell whether and how working from home impacts the long-term efficiency of organisations.
For those businesses which have been operating through the crisis under the strict distancing guidelines it would be logical to think that the relaxations announced will facilitate a faster return to more normal trading. This, of course, will be dependent on the return of demand from their customer base and where in the world that customer base is located.
For many businesses with furloughed staff the management teams will be considering, over the next few weeks and months, if and when those staff return to work. It is unlikely that all employers will require their entire pre-COVID workforce to return to work immediately and if activity has not recovered by the end of October (when the JRS ends) then, in those instances, some difficult decisions will need to be made over future employment levels.
All of these decisions are going to impact working capital levels to a greater or lesser degree. Many businesses will have seen an increase in cash at the start of pandemic as the impact of the various Government schemes has been felt and as working capital levels fell. As trading activity levels increase so will the demand on working capital. The extent to which companies are able to adapt and survive will largely depend on how they have managed cash to this point in the crisis. Each will be trying to conserve cash as best they can going forward and this may lead to extended credit terms being sought by customers (whether given or not) and pro forma invoicing being requested from suppliers – a working capital squeeze which can be severely detrimental to the ability of a business to continue trading without further support. We have already seen in areas such as building products that trade credit insurers have scaled back credit limits which will adversely affect payment terms and the ability to finance increases in working capital.
The banks have been broadly supportive throughout the crisis to date but it will be interesting to see, as trading activity levels recover, what further support the banks will be willing to provide, especially if the UK and the rest of the world experiences a second wave of the pandemic.
