When companies should accept government aid
The government has offered companies billions in pandemic financial support schemes, but there is a lot riding on the decision whether or not to accept help, so how do chief financial officers decide?
The devastating effects of the pandemic on hundreds of thousands of businesses throughout the UK has prompted chancellor Rishi Sunak to hose down the economy with eye-watering sums of money.
According to HM Revenue & Customs figures, as of December 31, 2020, £49.28 billion had been claimed under the Coronavirus Job Retention Scheme (CJRS) and, overall, £71.79 billion in loans had been approved across four main government-backed schemes by January 24, 2021.
Chief financial officers (CFOs) and other senior finance staff have had to consider carefully what to apply for, how to use the money and how accepting support from the government might affect their business reputation.
Directors of some large companies taking state support to pay furloughed staff have been criticised after accepting pay cuts but then being rewarded with generous long-term incentive plans for hitting targets.
Meanwhile, Tesco revealed it would be working with the government to repay £585 million it saved thanks to the coronavirus business rates relief scheme after its sales actually increased during lockdown and it paid shareholders £315 million.
What factors have CFOs been considering when deciding whether or not to seek government support and, whether they’ve received any cash or not, what other actions have they taken to shore up liquidity and their organisation’s viability?
Decisive early action
“Taylor Wimpey chose to utilise the government’s CJRS in April 2020 to support the long-term sustainability of the business and as a precautionary measure given the uncertain outlook at the start of lockdown and throughout the height of the first wave,” says CFO Chris Carney, who worked closely with fellow board members on the company’s strategy.
“In times of uncertainty, it is important to take decisive early action to protect the liquidity and resilience of any business, prioritising the needs of employees as well as wider stakeholders.”
By June 1, all Taylor Wimpey’s employees had returned from furlough. “We felt it was the right thing to do in the context of the resilient trading and strength of the business. Despite the short-term uncertainty, we felt confident the company was well positioned and the market environment would continue to be supportive,” says Carney.
While freelancers have complained about getting almost no help, some small businesses feel they have also been given less support than their larger counterparts.
“Furloughing met a genuine need for small businesses, but it concerns me we will all be paying a big price for the many large, well-capitalised and profitable institutions that took advantage of this scheme like, for example, banks and wealth management firms, which really did not need to,” says Lawrence Gould, a part-time CFO and mentor for a number of small and medium-sized enterprises.
Gould points out that some startups struggled to satisfy the conditions for the Coronavirus Business Interruption Loan Scheme and the Bounce Back Loan Scheme as they had not yet reached profitability. “A lot of these businesses would have become profitable employers but, with the advent of COVID, have fallen by the wayside,” he says.
Ben Adams, CFO at Get Nourish3d, a manufacturer of personalised vitamin products, says: “Furlough wasn’t really an option for us as a startup business. We have a small team with very varied and specialist roles, and unfortunately the furlough scheme didn’t allow for any flexibility. While some areas of our workload decreased initially, we still needed our skilled team to be able to work throughout the crisis.”
As a result, Adams had to focus on what the business could do for itself. “I joined the business in March 2020, just before the first COVID-19 lockdown, so it was very important for me, as for any new CFO, to fully understand the cash-flow position of the business, the key business drivers and all available sources of funding,” he says. “Until you fully understand all these aspects, making decisions is difficult and you cannot support the business effectively.”
Laser-like focus on cash flow
For most CFOs, whether they accepted government assistance or not, there was one area that has required laser-like focus. “Cash flow is the most important thing to manage in a crisis; it became the steer as to how we worked,” says Tamsin Ashmore, CFO of Ultima, an automation and infrastructure company that didn’t get COVID help.
“I did three or four different cash-flow models a day looking at all the different scenarios and assessed how we wanted to work with our customers. Keeping an eagle eye on cash has meant we haven’t written off any debt this year. We’ve been so focused on how we work with our customers and how we assess risk, that is how we have been cash generative throughout this period.”
Colleen Armstrong, financial controller at Percy & Warren PR, advises: “Spend time building strong relationships with your clients’ accounting teams. Don’t assume that a bigger company isn’t facing the same type of pressures, with staff furloughed and others working remotely; a personal connection will always be better received. Credit check your new clients and always have signed contracts with clear deliverables, scope of work, billing schedules and payment terms.”
Some CFOs chose to access government help while making tactical cash-preservation changes and undergoing significant restructuring. British Airways was one very prominent case, but Rolls-Royce, also hit by the collapse in air travel, undertook a variety of measures, both tactical and strategic.
The requirement to bolster its liquidity position as it worked on what it calls “self-help” measures was a major consideration for the company’s finance team.
Rolls-Royce says: “Subsequently, in April, we announced plans to conserve more than £1 billion in cash in 2020 through a range of measures including a group-wide 10 per cent salary deferral and additional 10 per cent senior management pay cut for the rest of the year. Then, in May, we announced a fundamental restructuring of our business to save £1.3 billion annually by the end of 2022 to deal with the medium-term impact the pandemic has had on the whole aviation industry.”
Reputation is a major consideration
In making a decision about whether to access government financial help, many CFOs have also considered the optics. “Reputation was one of several considerations in our deliberations; how would it look for a successful City law firm to be subsidised by the taxpayer?” says Jerry Merton, CFO of Bristows, a law firm specialising in life sciences and technology, which didn’t take government support and suspended partner distributions instead.
Communication has been central to his strategy. “We realised we’d have to increase the level of communication with all our staff to explain what we were doing. We also communicated regularly with our clients to assure them we’d continue to be there to give them the legal support they need,” says Merton.
Ron MacEachran, CFO of Isle of Harris Distillers, has had a similar focus. In particular, he’s been concerned about “the ability to engage positively in the market, maintaining both our profile and a great level of customer service, without the risk of short-term liquidity pressure”. He adds: “It is vital to maintain a close and open relationship with your key funders – investors and banks – giving them the best opportunity to support your short-term needs to facilitate medium-term sustainability and development. It was this relationship and line of communication that allowed us to get the support we needed from HSBC.”
Amanda Murphy, head of commercial banking at HSBC UK, says: “We encourage businesses to keep talking to their bank, whether that be about the government lending schemes and what companies need to do next or investing for growth. There will always be opportunities for businesses that have built capacity, flexibility and agility into their operations to grow.”