MDA Training

Tag: COVID-19

  • Easter Eggs are broken

    Easter Eggs are broken

    The coronavirus measures are moving quickly.  Travel bans in Italy, and the US is refusing to accept European travellers.  It will not be too long before Spain and Germany introduce similar measures. 

    In light of the Pandemic declaration nobody can complain about such measures, but there will be a price to pay.

    The travel bans will coincide with the Easter holiday.  This is the time of year when many holiday makers and businesses come out of their winter hibernation period.  The schools are on holiday and it is the first opportunity for families to take a week-long vacation. 

    Catch some late winter snow and go skiing, or some early spring sun and go sun-bathing.  Both of these options will be off the agenda if bans are in place across Europe.

    Of course, not all families will go overseas.  Many will remain in the UK or their own country and go to holiday or caravan park.  Rent a cottage in the country or do a city break and see the sights.  There are conflicting figures on how much the UK spends at Easter. 

    The figures range from £1.5bn in the shops to £13bn which includes holidays, trips and all shopping.  Do not forget that many of our European neighbours will come to the UK over Easter.

    For many garden centres and DIY stores Easter is critical.  It generates firm cash flows which will support the business throughout the rest of the financial year. 

    If Easter is poor, then these businesses will struggle to get ahead for the rest of the year.  Hotels and guest house, holiday parks and wildlife centres that have been closed throughout winter, Easter is the first opportunity to generate positive cash flow.

    I have not ignored but will not dwell upon airlines, hotels, restaurants and tourist attractions.  The measures that the UK government introduced yesterday to support UK business will be critical to the continued survival of many SMEs, particularly if the country closes down for two to three weeks. 

    The critical part of the financial support package is working out how to get the cash from the Chancellor’s red box into the hands of cash strapped business owners.  Nonetheless the measures are both welcome and necessary.

    Similar measures will be required across Europe.  How will business survive in Italy?  How many UK holiday makers normally take a break in Spain at Easter?  The financial crisis of 2008 threatened the very existence of many of our domestic banks. 

    The financial crisis that will impact on many SMEs are a result of country shut down at a critical time of year will require just as effective support mechanisms as were used throughout the financial crisis.

  • First round of medicine is on its way

    First round of medicine is on its way

    For more than several days we have been calling out for help for the SME community.  All the focus so far has been on protecting our general population.  This morning we have received our first dose of medicine from the Bank of England.

    The Bank of England has reduced base rates to 0.25% and cut the special capital buffer that banks need to maintain.  The special capital buffer helps to protect the bank shareholders and depositors should borrowers get into difficulty and not be able to repay.  All of this is very good news; the high street banks have the arsenal to support SMEs.

    We should not forget however that the high street banks have come through a very difficult decade since 2008/9.  The have had to rebuild both their business and balance sheets.  Part of that rebuilding process was to re-examine their lending behaviour.  Prior to 2008 credit was cheap and readily available.  We will not go over old ground again, but this approach cost the banks dear.

    During the rebuilding process banks looked at their lending criteria and refocused on the key elements of business sustainability and affordability.  In other words, does the borrower have a sustainable future and be able to generate sufficient cash to repay any debt.  Sensible policies which have resulted in credit being less freely available and only the stronger business being able to borrow.

    Now for the quandary.  High st banks have refocused on business with sustainable business models and robust cash flows.  Due to the continued impact of Coronavirus many SMEs face an uncertain future with little cash coming into the business in the short term.  Instinctively, these are businesses that the High St find it difficult to support because of the uncertainty surrounding future cash flows.  But if  SMEs do not receive bank support, they will have no future at all.

    It will require a bit of a leap of faith.  The High St banks need to look beyond the current epidemic.  When the outbreak is under control will the economy return to something looking more like normal?  Will the SMEs once again be able to generate cash and repay the extended facilities?  There are no certainties as we are all looking into to the future and wondering what it will hold.  Without the SME community our economy and employment levels will struggle.  In this current crisis the banks are part of the solution.  We need to hope that the banks can modify their lending criteria and step forward and deliver the second dose of medicine to the SME community.

  • Every cloud has a silver lining

    Every cloud has a silver lining

    It seems that every day brings another layer of bad news. The new cases of Coronavirus are growing at a quicker rate than when the virus was mainly contained in China. Serious questions are being asked about the international supply chain, and stock markets are nervous.

    However, there are flickers of sunshine from some manufacturers who have been squeezed out of the market because of the intense price competition that came out of China. Across Europe, there are many small, manufacturers who have survived the price competition from China by downsizing and supplying niche markets far and wide. There is an opportunity for these businesses to fill some of the gap created by a slowing in supply from China.

    There are some benefits to sourcing locally. The retailer can source the product quickly and given that the manufacturer is local the green credentials are enhanced. There are some obvious marketing benefits too – handcrafted, locally sourced, trusted and reputable supplier and unique product.

    So, opportunity, but also challenges to be overcome. The local manufacturer will not be as price competitive and not able to supply the volume sought by larger retailers. Local manufacturers may be able to fill some of the shortfalls with local niche products. Aldi has a reputation for doing just this, especially within the fruit and vegetable space. Aldi source from local farmers and producers and can get the product from ground to shelf very quickly.

    Local manufactures can be quick to adapt and change. There are funding issues to be considered. Stepping to fill the gap will require additional working capital, plant and equipment and even employees. These businesses may not have sufficient cash resource available to fund these requirements. Will traditional or alternative funders be willing to step in and support local businesses? What will happen when China gets its production machine up and running again – will the retailers simply revert to the cheaper alternative.

    A final thought on the consumers. We have been treated to a continual supply of cheap products from China. However, social attitudes are changing. There is greater interest in environmentalism, veganism and diversity. There are also signs that the consumer may be prepared to pay a little bit more for a product that satisfies their attitudinal benchmark.

    The retailers have also been exposed in that the principal source of supply was from China. Retailers did have a Plan B, a backup plan for when thing went wrong. The backup plan often another Chinese supplier. Current events may encourage retailers to be less dependent on a distant, cheaper source of supply. Local manufactures will take fill the entire supply chain. But with funding support, they may be able to fill some of the gaps with local, niche products and contribute positively to their domestic GDP.

    Author: Bill Liddell

  • If all else fails close down and restart

    If all else fails close down and restart

    Chinese manufacturing businesses have been closed for just over eight weeks now. The Chinese New Year has been extended. In reality the workforce has been in quarantine waiting for the Coronavirus infection rate to decline. The signs, according to official statistics, are good. The workforce can go back to work and fire up the productive boiler. But it will take time to restart and build up production. Perhaps another two to three weeks.

    When Chinese manufacturers are ready to export more time is consumed. A container ship from China to US or Europe takes at least three weeks. Assuming weather and port checks all run smoothly. Therefore, it could be another two to three months before manufacturers get their hand on parts and components. The sectors that operate to LEAN principles, such as the automotive sector, often only carry 12 weeks buffer stocks. It will be touch and go if these businesses can maintain full production in the short term.

    Meanwhile Coronavirus has broken out in Italy, South Korea and Iran. It is difficult to predict if these outbreaks will spread further across Europe. One consequence may be that border controls are tightened. Perhaps just as China comes back on-stream, Europe may find itself imposing more stringent controls. All of which is potential bad news for the European or American manufacturers.

    Within this scenario it is likely that manufacturers will hit cash flow difficulty. No manufacturing activity, no sales and consequently no cash coming in. The knock-on effect will be felt further up the supply chain too. Distributors, wholesalers and retailers will feel the cash flow pinch. Many of these businesses will have debt facilities with banks, trade finance firms and asset finance specialists. How will the funders respond to a period of low activity, squeezed cash flows and perhaps and inability to meet debt commitments.

    I can recall the 2001 outbreak of foot and mouth in the UK. Over six million cows and sheep were slaughtered in an attempt to control the disease. Many farmers, meat processors and food manufacturers found themselves in financial difficulty. Some banks wrote immediately to business’ involved in these sectors and confirmed that they would support customers. Debt would not be called in. This action provided much reassurance for the beleaguered sector.

    The worst-case scenarios may prove to be over-hyped. Management teams, funders and investors need to consider how they will collectively steer the business through an extended period of inactivity and much reduced cash flow. Sometimes we are all too slow to react. The supply chain issue has been talked about for the past few weeks, but only now are the equity markets pricing in the impact. Management teams and funders should start planning, for the reduction in operating cash flow over the next few months.