For many travel agencies and tour operators, managing finances during the pandemic will be paramount to survival. Todd Davison, managing director of Purbeck Insurance Services, offers his advice and answers frequently asked questions
What are the priorities for managing business finances during this uncertain time?
The first priority should be to fully assess the current financial position of the business – businesses cannot make informed decisions if the financial position is not up to date and accurate. Look at cash flow and forward project how it might look in 30 days, 60 days and 90 days’ time to help identify any gaps in the working capital position.
When working on these projections, take a realistic, optimistic and pessimistic view for each of those timelines. Consider the failure of key customers, the possibility of being paid late or the impact of a failure in your supply chain. You will then have a good idea of the business’s financial position in a range of potential scenarios.
Consider contacting landlords and current loan providers to arrange a payment holiday if this would ease pressure on cash flow. Consider the financial support available from the government before seeking new, short-term finance. If you do decide to take out a loan with a personal guarantee attached, make sure this risk is mitigated as far as possible through personal guarantee insurance.
What tips would you give for carrying out financial stress tests and responding to what they reveal?
Look at your current ratio – that is your current assets compared to your liabilities, which will help you understand your ability to meet short-term supplier and HMRC obligations. This would apply if you have low gearing, i.e. the low use of external debt such as bank loans.
Ideally you want to target ratios of 1:1 or higher. You can even apply your own working capital buffer of, say, 20-25% to these ratios to get to a ratio of 1.25:1 to maintain an adequate level of contingency funding.
Otherwise, if your business is highly geared, the current/liquidity ratios are important but also consideration of your debt-service coverage ratios, i.e. the operational free cash flow – earnings before interest, tax, depreciation and amortisation – your business is generating to meet repayment obligations to external debt providers including interest.
What do travel businesses need to know about tax, insurance and working capital at this time?
For many businesses, HMRC is a significant recurring creditor with VAT, PAYE, CT and NI contributions. Engage with HMRC if you experience or expect to experience difficulties in repayment. Explain your circumstances and, if necessary, look to agree a Time to Pay arrangement to help ease immediate cash flow concerns.
Review your insurance cover and consider whether existing insurance policies potentially provide coverage for loss of business income and protection of personal assets. Speak to your insurance broker or financial adviser to understand where you might have recourse for a claim if your business has suffered as a direct consequence of Covid-19. While it is sadly unlikely that you will be able to claim on business continuity insurance, if you already have personal guarantee insurance in place, ensure you are making the most of the business support services offered to firms in financial distress.
What other help can I seek?
Speak to your trusted advisors, including accountants, commercial finance brokers or advisory firms. Utilise the government initiatives aimed at helping to reduce the impact of Covid-19 such as the Coronavirus Job Retention Scheme or the Coronavirus Business Loans Interruption Scheme. Details are at businesssupport.gov.uk