Companies have a big role to play in a successful recovery but it’s important not to forget the fundamentals, finds Sarah Perrin
“In terms of what businesses should be doing to rebuild a better world, the most important thing they can do is make sure they don’t run out of money,” says David Petrie, ICAEW’s Head of Corporate Finance. “Sound working capital management has to be the first place to start.
“Companies should also now be focusing on medium-term commitments, including repaying emergency facilities from the government such as potentially quite large deferred tax liabilities, and restructuring the balance sheet to reduce gearing. But in order to do that, at least in part from retained earnings, identifying market opportunities so the business can trade profitably and effectively in the new environment has to be the approach. Businesses that are quickest at identifying and filling market niches will be most successful in attracting fresh investment to support growth. The challenges are both financial and strategic.”
Rebuilding the economy will inevitably involve substantial restructuring of businesses too short of cash to continue or whose business models no longer fit the new normal. “There’s not been much restructuring yet because of the furlough scheme,” says Peter Hemington, Corporate Finance Partner and National Head of M&A at BDO. “But this is a recession that will probably lead to more restructuring than we saw after the global financial crisis of 2008/09 because it’s impacted businesses in a specific way: businesses have to respect social distancing and therefore are being pushed online.” Digital retail is booming, whereas physical retail is unlikely to bounce back completely, for example. Casual dining in city centres may also continue to struggle, whereas suburban, quick-service and drive-through outlets are likely to continue doing well.
Businesses with a sound proposition but needing new funds should have options. “The banks are well capitalised,” says Hemington. “Private equity firms have money to invest. The capital markets in the UK – including private equity and other forms of private capital, the stock market and banks – are incredibly quick at reacting to market developments and there will be great investment opportunities in certain sectors. There will be plenty of money looking to invest in businesses with a future they can articulate in numbers and words.”
SMEs may need special care and support to help them survive and emerge strongly from the recession. “It’s incumbent on the whole ecosystem to try and safeguard some of the fantastic small business stock we have,” Iain Wright, ICAEW’s Director of Business and Industrial Strategy, says. “That means larger businesses paying suppliers on time and government providing more contracts to smaller businesses.”
Financial support must be provided evenly across the country to build a more resilient “levelled-up” economy. “SMEs have been in the heart of communities,” says Elizabeth Richards, Head of Corporate Governance at ICAEW. “They have seen the challenges, they know what the skills gaps are. So how do we take existing structures like the regional powerhouses or the local enterprise partnerships and get them involved so that, across the regions, we can start to develop skills and secure investment to build back better and make sure we’re ready for the next big challenge?” Government support will be vital.