What I’ve Learned From COVID-19: So Far … Part Two

Loan On Gold Coins On White Background

Welcome to the second part of my four-part series detailing what I’ve learned from the Coronavirus pandemic. To read part one, click here. In this part we’re going to look at money – what you have, what you need, and what might be available to you.

Bank balance vs budget

Here’s where we really sort the business savvy from the less experienced.

The first thing most business owners did when the crisis hit was check their bank balance – that’s smart. The really smart business owners then opened their budget to forecast how long that cash would last.

A business bank balance is no different to your personal bank statement – only with a greater number of transactions. If you check your personal balance at the beginning of the month, you know your mortgage or rent, utilities bills and more still have to be paid.

This is obvious and my intention is not to patronise, but I am shocked by how many business owners ignored (or possibly didn’t know) their liabilities for the weeks and months ahead. They were unable to predict their income, either. Anticipated income on crisis-day-1 changed rapidly as orders were cancelled and companies took blanket decisions to stop all payments. Even if orders progressed, payments were delayed as finance teams went on lockdown.

So, what did business owners do? They looked for loans, financing and grants, bolstering the cash pile that helps them to sleep at night. For many, this is a poor move.

Stop borrowing money you don’t need

In business, everything comes back to your budget, including raising finance. Simply injecting cash into your business is not enough to save it. Except for a few grants, it all must be paid back. The interest rates for the first twelve months are favourable; after that it’s painful.

As a business owner you’re on the hook – some loans even require personal liability. So, you might “save” your business and your employees’ jobs now, but are you happy to risk your house and kids’ education in a couple of years’ time?

Do you really need finance? The only way to know is to look again at your budget. What can you cut? What is essential? Adjust it for different scenarios. If you need finance, how much do you need? Take the smallest amount necessary to fulfil the needs of the business.

If you’re not sure how to create or run scenarios through your budget, call me. I’ll be happy to help.

There’s an exception to the “only borrow if you have to” rule

 The Bounce Back Loan Scheme (BBLS) offered by the government will give you interest-free money for a year, then a favourable 2.5% rate for the subsequent five years. You can repay the money at any time without penalty. Now, any smart business owner reading this will say, “Free money for a whole year – how can I use that to increase the value of my business or increase the value of my personal balance sheet?”

A super-smart business owner will say, “In the first year it’s a no-brainer to borrow the money and put it to work – I cannot lose.” For years two to six you should ask, “How can I make that money deliver a return greater than 2.5%?” In other words, how can you use it to make a profit?

Next time, I’ll be looking at leadership and business strategy in the face of the Coronavirus pandemic. To read part one in the series, click here.

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