How to protect your entrepreneurial spirit during COVID-19?
Written by Zoe Thomas, head of tax at Smith & Williamson in Bristol
Business owners have been working frantically to keep their businesses going amid the toughest conditions they are ever likely to face.
While some have had their end markets cut away by policymakers’ response to the pandemic, others have seen an explosion in new business. Each brings its own challenges.
In this environment, we see three types of business: those that are thriving, those that are pivoting and those that are struggling.
These last few weeks of lockdown have provided some businesses with a huge surge in demand – in particular food delivery businesses – some of whom have seen a 500 per cent surge in revenues since the crisis began.
Others successfully moved into new markets or products as their core business weakened. However, there are also those businesses who will be just fire-fighting through the next few months, hoping they will emerge with a viable business at the end.
Each scenario brings a different set of decisions. Thriving businesses need to consider what they will do if demand returns to normal when the pandemic has subsided. Can they keep costs sufficiently flexible? Pivoting businesses will be looking at whether to maintain their new direction or go back to their original plan. For those businesses where turnover has dropped, they will need to decide whether to adopt a business-as-usual approach, hunt out new markets or perhaps explore a merger.
Nevertheless, while there are different challenges for each type of business, we believe there is some commonality in the actions businesses should be taking today to shore up their businesses for the future.
Clients and customers
There will be a long-term reputational impact from the way businesses act today. People have long memories and will remember if a company treated them badly when they needed support. As many leisure businesses have discovered, there is a fine balance between preserving a business’s bottom line and also treating customers fairly. Should they be issuing refunds when it could tip their business into bankruptcy, for example?
As such, effective two-way communication is vitally important. People are far more inclined to forgive temporary lapses if they’ve been kept informed. Keeping engaged with clients through these tough times may help businesses bounce back. Most businesses will need to consider payment terms for clients but should also consider when to change this back as the period of distress comes to an end.
The recruitment market is moribund. Few will leave a job in this environment and competitors aren’t likely to be recruiting. However, how a business treats its staff today will impact how they feel about the business in future and how hard they are willing to work for you.
Access to talented individuals is still among the biggest challenges for small businesses. Larger companies may have deeper pockets and more scope to protect their staff. It is also possible that your staff’s enthusiasm for working for a small and exciting new business may wane when weighed against the insecurity exposed by this period of uncertainty. If you’re in a position to keep staff properly incentivised, it may pay to do so.
It doesn’t always have to be in cash, as more businesses are finding it cheaper and a better way to retain key individuals using share and share option schemes. The cost to the business is low and the value to key employees high and if structured correctly could tie people into the business for years.
If your business is in expansion mode, how you hire will be important and that will involve an analysis of the likelihood of boom times continuing once the restrictions are lifted. If you are likely to need to de-scale, fixed-term contracts are the logical way to manage short-term staffing needs. It is worth noting that the lifting of IR35 rules has created some flexibility for employers in hiring temporary staff. This may be a good opportunity for thriving businesses to bring in talented individuals disillusioned with their current company.
All businesses will have been keeping a keen eye on cashflow over the crisis period, and a good revised forecast is likely to prove important on the other side. It will be key to factor in any loans taken out and the repayment terms and whether the business will need to raise cash or make investments.
Cash is king, whether a business is thriving or struggling in this environment: if you are one of the lucky ones and your business is thriving, your expenses are probably higher and you need to know that you will get paid. If your business is under pressure, you need to ensure that you are not unwittingly supporting the working capital requirements of your clients.
Like any recession, this crisis will weaken some businesses irreparably. Even where the business is still viable, founders may be exhausted and keen to de-risk in various ways, be it merging or selling. There will be opportunities for businesses with cash to make acquisitions.
For the seller, this will be about de-risking but it should only be done at the right price. There will always be those will to take advantage of short-term distress to beat you up on price. While it is hard to know the value of your business in these uncertain times, take advice and don’t sell yourself short.
Keep your eye firmly on the long-term
Most entrepreneurial businesses solve a problem. In all likelihood, that problem will still be there when the dust settles on the Coronavirus. You have almost certainly worked extremely hard to get the business where it is today. The right decisions today can help preserve your business into the future.