The UK has crashed into recession for the first time in 11 years, with the economy shrinking a shade over 20% in the second quarter of 2020. No matter how much the media discuss this or indeed how politicised it becomes, a massive drop in GDP like this should come as a surprise to no one. We essentially shut down the country for over three months and as such negative growth was inevitable.
The depth of the recession has been described as being as bad, if not worse than the 1930’s Great Depression. However that was a continual depression that spanned several years. The key issue now will be how fast we can recover, such that the recession doesn't become a much longer term depression as in the 1930's.
A lot of that will be out of our control and will depend largely on the speed and effectiveness with which the Coronavirus pandemic, the “Black Swan” event that has created this dramatic decline in growth, can be brought under control through a more permanent solution such as treatment or vaccines. However there are a few things businesses should be looking at to help protect them, discussed below.
So, what does it actually mean for businesses?
Again the hardest hit sectors appear to be services, hospitality and retail and common sense tells you why - if businesses aren’t open, they aren’t earning money.
Job losses have started to take hold, despite the Job Retention Scheme and a lot of businesses are taking stock of both their ongoing costs and future cash flows. For instance average debtor days (i.e the amount of time it is taking businesses to be paid on invoices) has also increased, as companies look to hold cash for as long as possible before paying their creditors - this obviously becomes a problem for those companies waiting to be paid, who in turn look to preserve their cash by delaying payment to their suppliers and so on in what becomes a viscous cycle.
Perhaps the most pressing concern is with regards to payment deferrals, be this something like rent or even tax. Deferrals mean that these amounts still have to be paid at some point, even if they have been delayed for now (for instance VAT deferred between March and June has to be settled by 31st March 2021). The deferrals coupled with grants and employment support have perhaps given an artificial boost to some businesses which potentially require more remedial action, and have just pushed a critical point a little further down the road rather than addressing the issue head on.
We are gently reminding clients at this time that we are here to help if their businesses are experiencing difficulties and that our associations with leading business recovery and turnaround firms means we are ideally placed to assist any business experiencing financial pressure. Please don’t hesitate to call us if you think you need some assistance in this area.
It isn’t all doom and gloom, as June and July data has shown the economy starting to recover a little ground, as lock down restrictions were lifted, but there are obviously choppy waters ahead. June shows economic growth of around 8%. So from the levels the economy plummeted to in Q2, it is quite obvious that the only way is up for Q3 and hopefully this will continue into Q4 and 2021. With the media obsessing about the “shape” and “speed” of any recovery, the important thing is to ensure your business is planning, recovering and negotiating any further “bumps” in the road, and as such hopefully thriving.
The importance of prudent planning and forecasting into the next 12/18 months is now strongly coming into play and again advisory work of this nature, even for businesses who haven’t been significantly impacted by the pandemic, is becoming an essential part. With that in mind we are undertaking an increasing amount of work in the area of costing, budgeting and forecasting, so if you feel your business would benefit from such advisory services, please get in touch and we’ll be happy to help.