The effect of Covid-19 has been felt by all businesses, large and small - but the impact on small businesses has been significant. The three categories most affected are personal service, hospitality and retail - and the smaller the company, the harder the hit, with companies with fewer than 20 employees most affected.Why? Well, for starters, because businesses with fewer than 20 employees typically lack cash flow and capital, and with the UK under lockdown, continuing to operate has been impossible for small businesses which provide hands-on services, such as hair salons and spas, home improvement and repair contractors, and for many dental and medical offices.
It’s no wonder that 88% of small businesses in the UK are concerned about their financial position. But with lockdown easing and non-essential retailers gearing up to reopen with strict social distancing measures in place, what will the impact of these measures be? How will the ‘new normal’ affect small businesses? And what about help for small business owners?
The ‘new normal’ and what it means for businesses
All non-essential retail shops are set to reopen in England from Monday 15th June, provided they follow government guidelines to keep staff and customers as safe as possible. A few weeks later, on July 4th at the earliest, other businesses such as hairdressers, pubs, hotels and cinemas could follow suit. However, if these businesses can’t meet social distancing measures, they will be forced to stay closed.
But in many cases, this is easier said than done. Whilst a number of businesses in the UK are embracing the new normal by conducting virtual meetings and working from home as much as possible, things are very different for firms that rely on close contact. As a result, nearly half of businesses feel they wouldn’t be able to cope if the social distancing rules remain in place for another three months, whilst only 16.5% say that they would be able to cope if the measures remain in force for six months.
Making sure your business is socially acceptable
The steps which will be taken to protect customers and staff include limiting the number of customers allowed inside at any one time, frequently checking and cleaning objects and surfaces and encouraging customers to use hand washing facilities or hand sanitiser. And of course, according to government advice, there should be a 2-metre distance between people at all times.
However, recent research has found that in order for this to work, each shopper must have a minimum of 10 sq metres of space if they are to maintain social distancing rules - and with an estimated 70% of pre-coronavirus trade needed to break even, retailers would be lucky to see 30-40% of sales with this kind of capacity. But what about businesses where close contact is unavoidable?
Hairdressers, nail bars and beauty salons are set to remain closed for longer because the risk of transmission is higher in these environments, however, future measures could include having fewer occupied seats, the use of masks by staff and customers and the introduction of splash shields. But in addition to the extra wait for these types of businesses to reopen, the cost of making business ‘socially acceptable’ will be huge. So how can businesses adapt and survive? Read on for advice and help for small business owners...
One thing businesses can do in the meantime is plan ahead as much as possible. Start by using periods of inactivity to review your accounts and make sure you know who owes you and how much. You could also audit your stock to see if any could be freed up to bring in more funds, and it’s also worth carrying out a financial fitness report to review your balance sheets and see what efficiencies could be made to help with cash flow in the future.
In addition, if you are struggling to pay creditors, it’s always best to have a conversation and let them know where they stand. They will be much more likely to understand and show goodwill if you let them know there might be potential issues in advance, so make sure you get the conversation started.
Understand your break-even point
While breaking even might not seem like much of a business goal, it’s a really important reference point, especially in these uncertain times. A break-even point occurs when your revenues cover your expenses. In 2020, it has become much more difficult to put a reliable forecast on sales, with COVID-19 shifting consumer behaviour in new ways each week and month.
Put simply, people are buying differently - but break-even analysis simplifies the question, by figuring out the least sales needed to cover your expenses. Basically, it’s much easier to answer whether you can exceed the sales needed to break even than it is to guess your future sales.
Break-even analyses are also important for managing financial risk because your financial risk goes up the closer you are to your break-even point. For example, if you are less than 10% above your break-even point, then it would only take a minor increase in costs to fall below, however, if you are around 30-40% per cent above break-even, then you have a lot more room to manoeuvre.
There are two ways to lower the break-even cost: either lower your fixed costs or increase your margin. However, other things to consider include increasing the prices of goods or services, talking to landlords about lowering rents, reassessing opening hours and capping employee shifts and reducing fixed costs by converting them into variable costs.
Look at your fixed costs and variable costs
Some costs increase as your sales increase, such as materials and labour - these are called variable costs. However, some expenses don’t increase or decrease with sales, such as your rent - and these are known as fixed costs. So, if you have £1,000 per month in rent, this expense stays the same no matter what. Other examples include insurance and utility bills - and one of the most effective ways to reduce the sales you need to break even is to reduce your fixed costs or convert them into variable costs.
As a business produces more goods and services, variable costs increase proportionally. Variable costs can also change throughout the year; for example, for retailers, promotional advertising and casual staffing might increase in the weeks leading up to Black Friday. Likewise, variable costs can be scaled down, too - which means that reducing your variable costs is a quicker way to reduce your cash flow outflow rather than focusing on fixed costs.
Cut costs and manage your cash flow
In addition to fixed and variable costs, it’s important to assess and review your cash flow on a regular basis too. Assess your business and question each expense. What expenses aren’t essential? Do you need to be in a high rent location or could you move to a cheaper location? Employees can be a large expense - do they do too much overtime?
Similarly, if possible, you should also liaise with suppliers and encourage them to offer a better deal to save you money, as they want to keep your custom. You could also contact your landlord and lenders to seek time to pay or forbearance on interest rates, capital repayments and terms of current overdrafts where appropriate.
Access government-backed support
In the UK, the government has released a range of business support measures for UK businesses during the coronavirus pandemic. Options include:
- Talking to HMRC and requesting more time to pay your tax liabilities
- Accessing funding (80%) for staff who are not active in the business and transferring to the Coronavirus Job Retention Scheme
- Recovering Statutory Sick Pay paid to staff not at work due to the virus if your business has less than 250 employees
- Accessing cash grants such as the Small Business Grant Fund if your business is eligible for small business rate relief
- Accessing the Retail, Hospitality and Leisure Grant Fund if your business meets criteria
- Taking a 12-month business rates holiday (for eligible nurseries and also retail, hospitality and leisure businesses)
- Applying for the new Bounce Back loan scheme allowing small businesses hit by the impact of coronavirus measures to apply for a minimum of £2,000 up to a maximum of £50,000, or 25% of business turnover, with the government paying the interest for the first 12 months and guaranteeing 100% of the advance
- If your business has UK-based activity, with an annual turnover up to £45m, you may be able to access funding of up to £5m via the Coronavirus Business Interruption Loan Scheme
Seek expert advice
If you are currently facing financial difficulty as a result of the coronavirus, McAlister & Co can provide free help and advice. Our friendly and approachable team are experts in insolvency and turnaround solutions for business and individuals and can provide help for small business owners - so if you need clear, strategic advice about the options available, contact us today. Remember - the sooner you act, the more options will be available to you, so don’t suffer alone. You can also contact HMRC’s dedicated coronavirus helpline.