There is an old business expression – cash is king – and when faced with a global pandemic, the expression certainly rings true. In any economic downturn, recession, or depression, it is essential to watch every penny to avoid catastrophe, whether that be the insolvency of a company or personal bankruptcy.
Considering your cash flow or financial forecast is important as it helps identify the potential “pinch points” in advance and therefore allows businesses to plan for these. If you know when you might run out of cash, you can consider contingencies to bridge the gap or identify cost savings opportunities to delay hitting the red.
Take, for example, a TV production company. During March, they were ramping-up their pre-production ready for filming in April when suddenly the production had to be suspended due to Coronavirus. Amid all the chaos this would have caused, it would have been important for the finance team to carefully review their budgets and cash flow. Many TV productions companies operate on a fixed budget, so any additional costs will eat into their profit margins, unless they have a strong negotiating position with the distributor or broadcaster, who might accept an increased cost for delivery.
What costs can be delayed? For example, are there any contractual rights to delay payments to the talent that might ease cash flow? Can bookings for travel and accommodation be rearranged or will there be deposits that will be lost?
What costs can be eliminated? Are there any staff or freelancers that can be removed from the profit and loss immediately (subject to any contractual issues)? Many productions operate on short-term contracts, so removing people costs might be relatively simple, but there will be costs that are impossible to eliminate, such as storage costs, insurance and professional costs (indeed, lawyers and accountants might become more important).
What costs are going to increase on the restart of production? The pre-production will have to start all over again, so costs are duplicated. Also, on the restart, what additional burdens might coronavirus place on the production. Potentially needing to arrange testing for the cast and crew will incur costs. The duration of time spent in hotels might increase, both in terms of having additional time to quarantine from the outside world, but also the production schedule might take longer to account for delays while sets are cleaned between scenes or scenes simply might take longer to film (if they need more component parts to allow social distancing). Travelling might be more expensive if you require individual transport for each member of the cast to ensure social distancing. That said, there might be savings, especially if the talent are now being asked to do their own hair and make-up (although a canny agent might request an additional fee for this).
This is just an example of the many points a business might need to consider when they are looking at revised cash flows, with different businesses facing different challenges. For example, a theatre company will need to look the impact on sales with reduced ticket revenue (and potentially refunds of existing bookings), a lower league footballer should consider the impact on their lost appearance and performance related bonuses if the league competition ended early, and a band might find their touring income eliminated, but this might be offset by an increase from streaming revenues.
For individuals, the principles of budgeting and reviewing cash flow can be applied to their personal expenses. It is important to identify the fixed costs that cannot be eliminated, such as the mortgage repayments or rent, groceries, household bills, mobile bills, transport costs, taxes etc.. However, there might be potential savings (eating-in more, cancelling the subscriptions you no longer use or buying fewer luxuries, such as new clothes) or planned expenditure that can be cancelled or postponed (such as house renovation or the new car you had been considering).
Often, it is best to work backwards starting with the fixed costs you have and cannot avoid. You can then assess the amount of income you require to meet these costs, which might be daunting but always better to know the challenge ahead. Furthermore, you can set aside savings for any big fixed costs, so that you are not tempted to spend it in the meantime. Often it is the unexpected tax bills that can be the downfall of self-employed people, so I always encourage clients to maintain a tax reserve. While HMRC have been supportive with grants, most tax liabilities remain payable, with some being deferred by a few months. This only pushes the problem down the line and increases the temptation to spend the money that HMRC will come knocking for before too long. If you are struggling to pay a tax liability, reach out to HMRC as soon as possible, as you can often arrange “time-to-pay”, which will spread the tax bill over a period.
If you are reading this and panicking about not giving your cash position much thought until now, it is never too late to consider it. Take some time to get a good grasp of your business and/or personal finances. My main recommendation is to be realistic. There is little point in estimating a reduction in costs if it proves impossible to meet. Also, be prudent on estimating sales income – it is better to predict a lower amount and then receive a boost when the income is higher. Ultimately, the sooner you acknowledge a potential issue, the sooner you can plan for it or the sooner you can reach out to professional advisors to get the help you need.
If you want to discuss any of the above, or any other matter, just give us a call on 020 7183 3383 or email info@kma-spotlight.com.
