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COVID-19 & Weiji

Weiji - "What’s that?", you may well ask.  Weiji is the Chinese symbol for crisis, often said to include two concepts; danger + opportunity.  Whether that is true or not, it certainly includes the idea of being at a point where things change and there is no doubt that we’re in that spot right now.

The Covid-9 forced lockdown is being felt differently by small businesses – in some cases the businesses can continue to operate remotely albeit not as efficiently as they would in the workplace, others have been forced to shut up shop for the duration.  Some many not re-open.  It is importnant to understand the dangers presented by the crisis but equally important to plan ahead, innovate, and take advantage of opportunities. 

A very recent Westpac economic report said, in summary: 

The Covid-19 recession will be deeper than the GFC. We expect GDP to decline 3.1%, compared to 2.7% in 2008/09 

  • We expect unemployment will rise from 4% to 5.5%, or by 45,000 people. 
  • This will be a briefer recession than the GFC so long as the banks and the Government remain in good financial shape. 
  • There is currently stress in financial markets. This could lead to an unintended increase in interest rates unless the RBNZ takes action. 
  • We predict that the RBNZ will begin quantitative easing (buying Government bonds) within a week in order to keep interest rates low. 
  • We further predict that the RBNZ will initiate a Term Auction Facility to ensure bank funding remains smooth. 
  • And we predict that the Government will create some form of loan guarantee scheme to slow potential company failures in the tourism and travel industries. 
  • Government debt is likely to rise above 30% of GDP in short order. That is an appropriate response, but the Government also needs a plan to bring debt down again later. 

Fortunately, New Zealand’s banks and Government are starting from a very strong position. With the above actions in place, they are well-placed to weather the coming storm, allowing for an orderly post-virus recovery. 

Maintaining viability and liquidity during these difficult times will be the biggest challenge for most small businesses to ensure they are able to open for business again after the lockdown.  At times like these, it is not profitability that is the most important thing but managing cash.   

We’re a small business and are in a similar position to many of our clients.  We are in a lucky position of being able to work remotely, but it would be foolish to think that we won’t be affected.  Here’s what we are doing: 

Annual budgets & cashflow forecasts

We do this as matter of course, every year without fail.  There are a lot of reasons why we think this is important and here are just some of them: 

It enables us to set targets on a weekly and monthly basis, not just for the business as a whole but broken down to each team member.  That means we only have to look at a few numbers to know whether things are going ok and each person also knows whether or not they are pulling their weight. 

It provides context to monthly reports – if we don’t know what we were aiming for, we really can’t tell if the actual results for a month are good, bad or indifferent. 

We can plan for investment and also know when our lumpy payments will come out of the bank. 

We can revise our assumptions really quickly when things change.  We can also understand the financial impact of decisions before we commit to them. 

If we need to get external finance we can ask before we really need it and can show how and when we expect to be able to pay it back.  That greatly improves the chance of getting finance as and when we need it.  

We can evaluate the value we get from our suppliers and the impact it has on our top and bottom lines.  If we’re in a cost-cutting frame of mind then we can prioritise what is a must-have and what is a nice-to-have. 

If you’re not in the habit of doing annual budgets and cashflow forecasts, now might be a good time to start.  Once a model has been built, then it’s really easy to update as circumstances change or when you’re looking at the new year. 

We wrote a blog on the value of budgets and cashflow forecasts a few years back which you can find here .

 

Short-term cash Forecasts 

There have been times when cash has been tight or when we have needed to invest in the business and that investment has eaten into our reserves.  While we’re currently still able to work, we fully expect that cash collections might not be as prompt in the weeks and months ahead.  We also know that personal stress levels and the differing needs of our team will have a big impact on productivity.  We wanted to understand what that might mean for us, if for no other reason than knowing the answer immediately reduces uncertainty and therefore stress.  That can only be a good thing. 

 We’ve created a 12-week short term cash forecast broken down into weeks.  We’ve plotted our main spending lines over that period and made a guess at what our likely cash collections could be.  We’ll be recording the actual outcomes against our forecast each week so we know whether or not we’re on track. 

While the lockdown has been set at 4 weeks, I’d take that as being the optimistic view.  It would not surprise me if it were extended to 6 or 8 weeks.  And a worst-case scenario might be as much as 12.   

 

Invoice promptly and watch Collections

 

We switched from monthly billing to billing weekly some years ago and also changed our terms of trade from the 20th of the month following to 14 days after invoice.  Those steps have stood us in good stead and we now have cash coming in regularly rather than just once a month.  We can also see how we are going against our month’s target rather than waiting to be surprised at the end of the month.  That gives us time to implement remedial action before the end of the month and reduces the pain of spending a whole day creating invoices, a task no one here particularly enjoys. 

At the same time, we also introduced different ways of paying – monthly instalments (partially in advance), credit card payments, and direct debit arrangements.  There are a lot more payment options available these days and we’ve now switched to using GoCardless which enables our clients to set up payment or recurring payments ahead of time by bank transfer or credit card.   

 Most of our clients are on Xero so it is easy to set up automatic invoice reminders – I occasionally forget to pay people and will always pay immediately when I get a reminder that I’ve missed a payment.  And while Xero doesn’t issue statements automatically, it is really easy to send these out to all clients at the end of each month. 

 There’s also room in Xero to make notes of payment arrangements against unpaid invoices so everyone in the organisation is on the same page.  

 Regardless of the processes you have in place, there is no substitute for a regular review of outstanding and overdue debts.  There is also no substitute for a phone call to understand what is holding up the payment and when it can be expected to be paid or negotiating a payment arrangement.  A telephone discussion will also uncover any service quality issues you may need to rectify. 

 

Be Generous 

We know we’re in a much better situation than many other businesses and for that reason we can afford to be generous towards those that are worse off.  The key to getting through this current situation with customers, staff and the business intact includes being kind to each other and making sure that cash circulates.  For that reason, we will be paying our small business suppliers more frequently, rather than once a month.   

We’re also open to payment arrangements or deferrals with our clients who might be struggling financially over the next few months and are, as always, here to talk or to bat around some ideas and act as a sounding board.

Weiji 

What’s that, you may well ask.  Weiji is the Chinese symbol for crisis, often said to include two concepts; danger + opportunity.  Whether that is true or not, it certainly includes the idea of being at a point where things change and there is no doubt that we’re in that spot right now. 

 I’ve been talking to a lot of people this week to find out how they are coping.  It is reassuring that many are feeling confident for the future of their businesses, even when they are unable to work during the lockdown.  The enforced break is not going to waste with some people using the time to build a new business opportunity and others to build their skills and knowledge or fulfil a long-held dream of learning to play the guitar or speak Spanish. 

 I have absolutely no doubt that we can all take some learnings from this unequalled experience.  This is the time to reflect on whether your business could be structured differently, if it is possible to use technology to smooth out the peaks and troughs, if there are avenues for your goods and services that could be developed, and how you can build meaningful relationships with your customers and convert them into raving fans.  If you’re not doing it, then rest assured that your competitors will be.  This is my favourite example for today https://www.goodgeorge.co.nz/shop/product/349324/Squealers-and-Sanitiser/ 

Don't miss the opportunities. Ensure your business is safe but start thinking now about how you can leverage your strengths over the next 12-18 months. Now is the time to review your business model and think differently. Don't be afraid to throw ideas our way over an e-coffee, we're always curious to hear what you have in the pipeline.  Until then, stay safe and stay healthy!


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