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Beyond the balance sheet

Exiting the coronavirus lockdown will hurt profitability

Chris Thompson 01/7/2020 8 minute read

Chris Thompson on the slow return to normal life and the new challenges businesses are likely to face for some time.

Gradually the coronavirus lockdown is being eased and our everyday lives look more likely to resume. Unfortunately it won't be a case of as you were across the board, many organisations will undoubtedly return but not to business as usual.

Government support measures during the pandemic helped keep businesses alive and employees paid during the economic freeze. That in turn might ensure the return of consumer demand as people emerge from their homes, with activity picking up, and the economy thawing out.

However, the threat of the virus and a second spike remain! New rules and restrictions in workplaces and how we do business mean that sales will take time to return to previous levels and margins are likely to be squeezed.

The real challenge won't be restarting operations but rather finding a way to do so profitably.

How to monitor costs and performance post coronavirus lockdown >

Easing restrictions and a slow return to trade

Much like the lockdown, the return to trading will be protracted. How and when your enterprise resumes doing business is likely to be dependent on which industry or sector you operate in.

At the time of writing this post in early June we have already witnessed parts of the economy open up again. At present, non-essential businesses can open from 15 June 2020 and it looks as though the schedule could be along the following lines:

  • Engineering and construction - returned in May and June
  • Retail, financial services, most offices, and education - June and July
  • Pubs, restaurants, and private events - July and August
  • Gyms and public events - September to December

 

Will demand and sales return?

The government have provided much support for the economy some of which includes:

The idea was this would prevent the economy from shutting down as a result of the lockdown and ensure as it eased, so people could return to spending.

However, the initial signs are that UK consumers are reluctant to part with their money given the uncertainty of the virus remaining in the population and the threat of a second wave. The FT reports that economic activity through May, when some were encouraged to return to work, was an improvement on April but remained significantly lower than the previous year. 

Then factor in that the furlough scheme for some employees may end up in redundancy! The reason being it will likely become clear to many owner managers that there just won't be the prior demand for their products or services in a post lockdown corona world.

Sales and activity levels may return eventually but it's far from certain when that will be!

The challenge of how to make money?

Where there are question marks over consumer demand, the likelihood is achieving profitability is also very uncertain. Supermarkets for example have adjusted operationally to stay open and serve people during the lockdown. They've even experienced an increase in food sales.

However, despite being an essential service, other areas of their businesses such as general merchandise and clothing have struggled. So while food may have done well, the time and effort of getting it to us safely during lockdown has brought significant extra costs.

The same is even true for the online behemoth, Amazon. They reported recently that despite a 28% increase in revenue, Amazon could struggle to break even due to employing more people, purchasing protective equipment, and disinfecting their huge warehouses. 

These very trials that such big businesses and "essential trades" have had to overcome, in the form of new measures and policies to ensure social distancing, will now afflict SMEs as they return. All organisations will have to find ways to re-open operations in a manner that prevents the spread of the virus. That will in all likelihood increase the cost of doing business

Ensuring social distancing

If you operate a business and you're now looking at returning to premises, social distancing will require most of the following:

  • Perspex dividers between desks
  • One-way systems
  • Reconfiguring factory floors and office spaces to limit numbers of people
  • Regular use of hand sanitizer and screen wipes
  • The purchase and use of personal protective equipment such as masks
  • Deep and regular cleaning of all spaces

This is an additional burden and cost to businesses that will hit the bottom line. Time and effort will have to be allocated so that someone is responsible for ensuring employees adhere to these rules and the above tasks are carried out. That means resource being diverted from other, usual, essential business activities. 

This could also be particularly problematic for the hospitality and retail trades. In these sectors sales are particularly reliant on immersive experiences, and that could be very difficult to recreate in a new, more socially restrictive environment that limits interaction.

The hit to efficiency and effectiveness

The likelihood then is productivity levels will drop. Social distancing on transport will probably lead to a rota of working hours in many businesses. Staggered working denies collaboration, thereby impacting on innovation and effectiveness.

The need for drastically reduced numbers on public transport could result in longer commuting times. As a consequence people will spend less time at work doing productive things. So while businesses face the prospect of doing and producing less, the challenge of the same overheads, that existed prior to the outbreak, such as rents and utility bills will still need to be met.       

Supply chains

The pandemic appears to be fast forwarding existing trends. Examples include the adoption of cloud software and remote working practices as well as cashless transactions. The reverse of globalisation is another. Prior to the COVID-19 crisis we had trade wars between the USA and China. This generated political debate regarding the benefits and issues caused by global trade.

The emergence of the virus and subsequent lockdown have exposed various countries reliance on cross-border trade. The supply chains of many businesses now incorporate goods and services travelling across several countries, even continents. This has been done in the name of efficiency but has been shown to be very vulnerable in a time of crisis. 

Since January 2020 many government's have stopped the export of medical equipment and supplies. The point is globalisation appears to be in a sate of  decline. Sourcing cheap items from low cost manufacturers in far flung parts of the globe, now looks like a very tenuous strategy that's vulnerable to disruption.

This could mean bringing more production home, known as reshoring, but that requires significant capital investment. Think of things such as more warehousing, obtaining plant and machinery, as well as upskilling people to assemble and produce things.

Finally, there's the likelihood that quarantine restrictions will increase the time it takes for goods to travel across borders. The same is true for people, with business reliant on understanding people and developing relationships. This will all add to the cost of doing business.

Debt and the need for an accountant

Sales looking anaemic and margins squeezed will bring a focus on debt levels and the ability of organisations to service their loans. The days of cheap finance and the tech sector approach of pursuing market share at the initial expense of making money, could be over. 

Instead the focus will be on implementing and maintaining a tight control of your costs. If monitoring the finances and accounting is not your area of focus, then now more than ever you will need the assistance and advice of a good accountant.

In this new environment of doing business they can provide the following essential services to help you:

  • Develop budgetary controls and targets
  • Monitor progress to your goals and business plan
  • Identify areas where cost savings can be achieved
  • Potentially save money by optimising your tax profile
  • Provide you with timely financial reporting, legal, and industry developments

If you don't use an accountant, or aren't receiving this level of services from your existing one, then the easing of lockdown will likely make it a necessity that you instil essential fiscal discipline in your SME business.

Finally, remember that every situation provides an opportunity. In this instance re-opening means you can seize the moment to:

  • Win new customers
  • Gain brand loyalty
  • Focus on communicating your offerings
  • Pivot the business, find new ways of servicing customers and additional revenue streams
Professional, business advice to assist your business through the COVID-19 downturn

The content of this post was created on 11/06/2020 and updated on 01/07/2020.

Please be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.

 

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