Scenario planning for a profit constrained future

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In August 2020, we surveyed 216 business leaders to explore the impact COVID has had on their business and how it might affect businesses over the winter.

In this article, the first in a series based on our research findings, Principal Jonathan Franks discusses how businesses can prepare for what will be for many an increasingly profit-restrained environment.

The survey and report found that almost half (47%) of the 216 business reported a significant loss and a further 23% reporting a slight loss in turnover. It is a picture that will no doubt be echoed across the country.

What is particularly worrying is that almost a quarter (24%) feared a permanent loss in turnover at a time before the government introduced its further restrictions in September. It is this prolonged period of uncertainty that is and will continue to cripple many businesses.

Businesses told us that, on the whole, government support has been good. Its Bounce Back loans for small businesses are seen as particularly successful and the Coronavirus Job Retention Scheme (CJRS) helpful.

But whilst it has been good, it has not been universally fair.

Hospitality and leisure business have faced particular challenges and continue to do so. Some four million people in the UK work in the hospitality, travel and retails sectors with more in their supply chains, and its future, certainly over the next six months, is looking difficult.

It will sound harsh, but businesses facing a further six months of restrictions are fearful of some hard truths – even if the business were to remain viable in a post-COVID world, can the business survive the next six months?

Business owners have little help in envisaging a post-covid world, but many see that there will be no magic wand bringing us all back to how it was before. They must ask themselves if their business model will work in a post-COVID and, potentially, a post-face-to-face world? If not, can the business model adapt, and how?

In most instances, with targeted government support and the adaptability we often see in small and medium sized business, they can. But they have to get there first.

The key will be detailed scenario planning and perhaps the equivalent of a temporary hibernation.

With the help of your accountant, a typical scenario planning exercise will start with the worst-case position – zero income. What would zero income look like and how long can a business survive with zero or little income?

The exercise continues at different income points building a picture of how the business will react and needs to change, taking into account fixed overheads such as rents, and more variable ones, like salaries and taxes.

Government has stepped in to help businesses with some of the fixed outgoings: taxes can be deferred, and the furlough scheme helped reduce wage bills. But, the CJRS replacement, the Job Support Scheme, falls considerably short of its big brother and is likely to cost businesses more per hour if they choose to keep staff on part-time. And whilst there has been a mortarium on landlords foreclosing on tenants that are unable to pay rent, the government has been reluctant to support landlords directly and they cannot continue to indefinitely restrict the running of their own businesses.

A scenario planning exercise will consider the costs of doing nothing, and work to slow down fixed costs to allow the business to survive in a temporary stasis if it is necessary.

The emotional toll on business owners cannot be under-estimated when undertaking such an exercise. People we speak to rightly fear seeing a business that has taken many years to create seemingly crumble beneath their feet.

Here, we question whether the government can or should support businesses over a prolonged period of time. Governments do have a choice and now is not the time for political ideologies.

I would argue that government support should be seen as a scaffold, supporting a business whilst the repairs are done while recognising that support cannot continue indefinitely. Targeted support for those who cannot operate should not be about the size of the business but the nature of it and what government is asking of it in this crisis.

One option would have been the evolution of the CJRS scheme, with businesses able to access the support they need now such that it is only repaid when a business returns to profitability – a little like the student loans. Anti-avoidance measures would of course be needed, but it would offer the lifeline businesses need and that the CJRS replacement is not able to offer.

Finally, scenario planning will look at when a business will ‘wake up’ from its hibernation. How will work return and in what volumes and how can business owners prepare. This is particularly important for leisure and hospitality businesses as we are, in our hearts, social beings that what to spend time with others, to be entertained, and to escape the frustrations of everyday life. It is often said the recovery from a crisis is often more difficult that the crisis itself. Only by planning and adaptability will many businesses will see their recovery complete.

Jonathan Franks, Principal.

Should you require any assistance please get in contact with one of our friendly experts on hi@hhllp.co.uk

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Jonathan Franks

Jonathan’s 30 years in practice have been devoted to looking after owner-managed and family businesses, whether as auditor, accountant, or adviser on corporate transactions.

Contact Jonathan at jonathan.franks@hhllp.co.uk or on 020 7004 7110