Michael Manners, Founder Director of Limelight Learning UK Ltd, looks at possible outcomes of the easing of lockdown and provides us with a 12 step plan on how to keep your vehicle recycling business afloat especially if a second wave occurs.
The full impact of COVID-19 has not yet been felt as good businesses will yet go under through lack of cash. The auto-recycling industry has a sound business model and a substantial track record, so banks will be supportive. However, that comes at a price even if it’s cheap by historical comparison and the bottom line will be eroded.
New car sales are down 54% partly because people are preserving cash. There has been a significant reduction in traffic with the consequent lessening of accident damaged vehicles. These two factors reduce the availability of ELV’s.
The easing of lockdown will have one of two outcomes. Either this pandemic will remain stable or will get worse with a double peak – it cannot get better. Some pundits are claiming that it will not be a V or U shaped recovery but a W one. Therefore retention of cash is even more critical in these strange times of global pandemic – so plan for the worst and act on that plan.
The full impact of COVID-19 has not yet been felt as good businesses will yet go under through lack of cash.
Shrewd businesses will have built up cash reserves in good times for that rainy day that always comes. You don’t know when, why or for how long, but you know it will happen. So what can you do if the first wave of coronavirus has already played havoc with cash and a second wave occurs?
Here is a twelve-step plan:
Step One: Review all capital expenditure. Ask the question ‘what is the consequence of not spending this money now but deferring it to an unknown date in the future?’ If you can muddle through without it then do. If you cannot, take a close look at all available means of funding Capex other than outright purchase, but remember this comes at a price. Also, review selling assets.
Step Two: Take advantage of every Government led support for wages and other benefits on offer.
Step Three: Ensure Credit Control chases cash with determination. Review reducing credit periods. With debtors, extend payment as much as is commercially viable without putting your reputation at risk – you do not want false rumours about your solvency to spread.
Step Four: Reduce headcount. Keep key personnel in place. Volumes are probably down and you cannot afford passengers. Of course act within the law.
Step Five: Examine every overhead and negotiate better terms for IT, telephone systems, rent, sales and marketing, eBay, auditors, lawyers. Scrutinise every item in detail.
Step Six: Talk to your bank and increase lines of credit. Talk to your auditors and seek advice from every quarter.
Step Seven: Defer dividend payments – better for shareholders to have a viable business in future than no business at all.
Step Eight: Make all personnel aware that waste costs money. Turn off the lights. Do not print emails. Ensure that every saleable component is not scrapped unnecessarily. Some of the points are petty but exist to reinforce the message that cash is the top priority.
Step Nine: Scrutinise processes and procedures. Are you using too much packaging material? Are you using the right packaging materials? Are you scrapping tyres that have resale value? Are your forklift drivers causing avoidable damage? Do all personnel understand that yours is not a scrapyard but a recycling plant as this mentality impacts on efficiency, waste reduction and cash management?
Step Ten: If you are the CEO, ensure your accounts department rings you at 9 am every morning with the previous night’s cash at bank figure to keep cash in sharp focus and you properly informed. Improve cash flow forecasts – you do not want nasty surprises.
Step Eleven: Run weekly meetings with heads of departments to reinforce the need to preserve cash and invite their input on how to do it. Instigate a Purchase Requisition system for expenditure over a limit of say £500 for sanction by higher authority.
Step Twelve: Heavily discount old stock to generate cash.
Those that survive COVID-19, especially if there is a second wave, should apply the lessons learnt. In summary, they are:
- Create a ‘war chest’ of cash ready for the next rainy day. Beware getting into so much debt that any cash generated is swallowed up by interest payments. When interest rates rise some heavily indebted companies will not survive.
- Ram home to all employees that cash is the lifeblood of business and not waste anything that has a realisable value. Do it by relentless ‘management nagging’, training and education. This industry wastes thousands every year through carelessness and neglect.
- Ensure you have greater than needed lines of credit with the bank – safety net.
- Review all expenditure, if not essential don’t buy it – luxuries are for when your ‘war chest’ is full – and even then is questionable.
- Stay ‘lean and mean’ in good times – resist the temptation when things are going well to pile on ‘fat’. Peaks are inevitably followed by troughs! Watch trends, stay vigilant and keep in control. Assume that disaster is imminent and plan accordingly.
- Refine your negotiating skills and use them to minimise costs.
- Improve Credit Control, take Cash Flow Forecasts seriously and review variances – make the head of finance fully accountable.
- Ensure your processes convert metal to money fast – piling up inventory reduces profit and adversely affects cash.
- Persist with a 9 am call giving the cash at bank figure.
- Take advantage of those who succumb to acquire at bargain prices complete businesses or plant, machinery, equipment, land, key personnel – move quickly because your competitors will – our American colleagues have deep pockets.