Why debt might not be the right option for your business

A lot of accountants are advising their clients to borrow money to tide them over through the COVID-19 crisis. But Zoe Whitman, founder of But the Books, argues this isn't the right option for many small businesses and shares her tips for going back to finance basics to choose the right way forward.

The government wants to keep businesses going and an unprecedented support package has been announced to keep people in work and to tide businesses over. There are grants, a job retention scheme, tax bill payment holidays and a government backed Coronavirus Business Interruption Loan Scheme to support businesses' cash flow in these difficult months.

There's a saying that revenue is vanity, profit is sanity and cash is king. Never has it been more true. You might have money in the bank today, but how long will it last, and what will you do if it runs out? Will you take out a loan? For how much? For how long? And how will you repay it?

If you're going to borrow, you're going to need to present your bank with a cash flow forecast, and before I go on, let's remind ourselves of how to build a simple cash flow forecast. Work through this with me if you like.

Open up Excel. Put your bank balance right now at the top. List out the money you know is coming in this month and the money you know is going out. Add up the totals and you'll see what your bank balance will likely be at the end of the month. Do the same for the next two months and you'll have an idea of where you might be in three months time. How does it look?

Now, each of those income streams you have coming in. Are they likely to continue at that rate? Are all of your customers going to survive the next few months? Will they still want what you're selling? Are they going to ask for discounts, downgrades or longer payment terms? Will things pick up in three months time? In six months? Delete anything you don't think you can rely on. And add in the government grants if you qualify for them and add in new revenue streams you think you might be able to generate as a result of the current crisis.

I'm an accountant, so of course it makes sense for me to start shouting about cash flow forecasting, but how many of my small business clients who are cutting back have a budget for that right now? Cash is tight for many, if you're pivoting your offering, be realistic in your assumptions about what you're likely to be able to sell.

Have a look at your spending

Is there anything you can do without? If you have a tax bill to pay, delay that, can you delay payments to any of your other suppliers or arrange a downgrade and smaller fee? Businesses want to stay in business so are likely to be open to negotiation if you pick up the phone - but remember that there are other businesses at the end of the line, and then revisit your income forecast with this insight, because your customers are likely to be doing exactly the same to you right now.

A spreadsheet is absolutely fine to make a start, but you can do something more comprehensive than this if you want to - at no cost. Fluidly for example offers free cash flow forecasting software which you can use to build out a 90 day forecast with the option to add different scenarios for different outcomes. What's key is that you spend 30 minutes asking yourself about how your income and expenditure will look for the next three months.

Right now is about survival. Will your business still have money in the bank and still be viable in three months time? What if this goes on for six months or until the end of the year, what then? Knowing your numbers now will ensure you're informed to make decisions about what happens next.

If you can see a cash shortfall in the coming 90 days, borrowing might seem tempting. The loans are there and banks are ready to lend. You're going to need some solid figures to go to the bank with though, and my concern is that it's difficult to set concrete figures for anything right now.

We also need to keep in mind that any borrowing will need to be repaid. Any delayed payments will still need to be paid, and any decisions we take right now, will affect our businesses later in the year and into the years ahead. For some businesses, borrowing to fill a cash flow shortfall might not be the option. For the very smallest businesses, it may be more sensible if circumstances allow, to cease trading, cut their losses and to start afresh when some sort of normality has resumed.

I think of my behaviour as a consumer right now so I can be realistic about how my customers might be feeling. Our family's world has changed.

We've stopped shopping at our supermarket, choosing instead to buy our essentials at the cornershop and our local deli. My husband is thankfully working full time, but I'm aware our income could suddenly take a hit. We've stopped buying anything but essentials and we're going back to basics, saving money where we can so we have a buffer should we need it.

In the business, I've cancelled subscriptions to anything we can do without. I've gone from receiving regular deliveries of "stuff" from Amazon to buying nothing but what is essential to operations. I don't know how long this will last. I suspect our behaviour as a family will be drastically changed in the future as a result of this and the realisation of what we can do without. I'm sure we're not alone.

It makes sense for every business to plan for the next 90 days at least and to make a plan for filling any cash flow shortfall. But loans aren't for everyone, we don't know how long this will last so be realistic about your business's prospects and be wary of taking on debt and the responsibilities that brings if there is another option for you.