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Business, Survival

Cash Disaster Recovery

What is a Cash Disaster Recovery Plan and why do you need one now more than ever?

By Barrie Dowsett, CEO of Myriad Associates

As the old adage goes, ‘cash is king.’ 

It’s the lifeblood of any functioning business and, of course, without healthy cash flow, it leaves the door open for circumstances to go south, fast.

If there’s one thing COVID-19 has taught us over the last few months, it’s that you never know what’s coming next and that you always need to be prepared.

Worryingly, ONS data released last month has highlighted that 42% of all UK businesses currently trading only have cash reserves that will last six months or less. 

We also know that during the first three months of COVID-19 hitting, the UK economy shrunk by nearly 25%. With the economic effects of the pandemic likely to persist for some time yet, there’s no doubt this makes for frightening reading.

The fact is, whilst a company could have fantastic revenue, reasonable expenses, and significant income, if its financial operations are not efficient it could still suffer negative cash flow and face bankruptcy

This is why every business should prepare for emergencies by having a Cash Disaster Recovery (CDR) plan ready and waiting.

What is a Disaster Recovery plan?

A Disaster Recovery Plan (DRP) is a structured, well-documented, plan that describes how an organisation can quickly get back on its feet after an unexpected incident. 

They are outstanding practice and highly recommended, regardless of business size or sector.

Typically, Disaster Recovery plans focus on IT systems and business continuity.  However, many ignore what is probably the most important business factor – Cash. It doesn’t matter if you incorporate a cash chapter into your Business Recovery Plan toolkit or have a separate Cash Disaster Recovery Plan, the most important thing is that you do something.

Tip: Don’t forget, the cash DRP should also be regularly maintained and tested, so the organisation is always prepared.

What are the key elements a Cash Disaster Recovery plan should include?

Inventory of cash resources

Your CDR plan should have an inventory of all available cash resources. 

This could be bank loans, invoice discounting facilities, private investors, government incentives such as R&D Tax Credits, and grants.

The inventory should include the providers’ contact details, cash amounts, terms, and how long it takes to draw down funds.

Essentially, a business must evaluate all of its processes methodically in order to determine which ones are truly critical (for example, website payment functions and company payroll). 

The plan should focus on short-term survival, generating cash quickly enough to stay afloat. If any processes don’t have an immediate necessity then they should be delayed if possible.

Define your tolerance for downtime and loss of business

How long can your business realistically be ‘offline’ before it starts to seriously struggle? 

Take the COVID-19 pandemic as a guide to determine the impact on your business in terms of downtime (how long) and loss of business (how much).

Prepare a worst-case cash flow forecast

Develop cash flow forecasts based on a worst-case scenario and take into account any immediate reduction in revenue. 

Factor in cost reductions based on contractual commitment and consultation periods. Finally, make sure you update the cash flow on a regular basis (at least quarterly) to make sure you know the extent of additional cash resources you may need.

Have spare cash in your back pocket

In an ideal world, you will be sitting on a nice little nest egg for those ‘rainy days’. 

However, if your trading performance hasn’t allowed you to build this up, think about having lines of credit open to you or ample headroom in your current facilities.  

It may be that you never need to drawdown, although it will give you peace of mind that options are available if you need them.

Take advantage of all government financial support

Even if you don’t think you need it, secure as much government support as you can. 

That could be a business grant, loan, R&D Tax Credits, deferment of tax liabilities, or a job retention scheme. 

It is always best to have too much than not enough, you can always pay back loans early if you wish.

Don’t forget there are various financial measures the government has put in place to help companies during the pandemic. A number of them are available and they’re updated regularly, so we strongly recommend keeping up to date on the Gov website.

Appoint a task force for rapid response

Make sure you list all relevant positions that need to be involved. This will certainly include many members from the finance team such as the finance director, finance controller, finance manager, and management accountant. 

In addition, include staff from HR, senior management, and pretty much all department heads that can have a positive impact on preserving cash.

In conclusion

Businesses that don’t have a well-communicated, readily available Cash Disaster Recovery plan are leaving themselves extremely vulnerable. 

Changes in trading conditions can be quick and dramatic, and scrambling around trying to create one in the heat of the moment is unlikely to work.

When it comes to boosting cash, at Myriad Associates we can’t emphasise enough how important tax incentives such as R&D Tax Credits and R&D Grants really are. 

These are two areas that have existed for many years, but far too many companies are still missing out on the vital cash they generate.

Once a clear, detailed CDRP has been created, you really will feel a huge weight lifted off your shoulders. After all, who knows what’s around the corner.

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