Since the start of lockdown, most owner managers have become used to real-time contingency planning and agile decision making. However, with non-essential shops now allowed to reopen, they have been faced with another high-risk financial decision – should they stay closed or reopen?
Knowing the key areas to consider and conducting effective financial forecasting can help retailers to weigh up the costs involved in both scenarios, and make the right choice for their business.
Since the start of the coronavirus pandemic, owner managers have had to react quickly to Government-led developments in order to protect their business performance. For example, when the Job Retention Scheme was announced on 20 March, with subsequent updates, making quick decisions about whether to use the scheme, and which members of staff to furlough, enabled some businesses to make the most of the financial support available.
From 15 June, many SME retailers will have turned their attention to the question of whether to reopen their stores. This is potentially a high stakes financial decision however, and it is essential they look before they leap by considering the implications of both choices for their business.
In order to welcome customers back through their doors, UK stores must ensure that they are “Covid-secure” by complying with new Government guidance. As well as developing hygiene procedures, such as increasing the frequency of handwashing and surface cleaning, they must take steps such as limiting the number of customers allowed through their doors at any one time and introducing systems to enable customers to keep two metres apart while shopping. The guidance also recommends that fitting rooms stay closed, due to the challenges involved in operating them safely, and to limit the handling of the merchandise.
In order to decide whether reopening stores is financially viable, it will be important to weigh up the additional costs involved in implementing coronavirus safety measures, against predicted revenues. As part of this consideration, it’s worth bearing in mind that consumer activity is unlikely to immediately return to its pre-Covid levels. At the same time, with the end of the Government’s furlough scheme on the horizon, owner managers need to consider whether staffing levels will need to change.
Stores belonging to a chain have a decision making advantage, with the ability to conduct a reopening ‘trial run’. For example, opening one or two stores at a time could allow them to identify any potential problems, such as too many or insufficient staff, and make the required changes. This would allow them to put solutions in place before more stores are opened across the country. Another important area to consider is the size of individual stores, and whether social distancing measures will be possible. Smaller retail properties with long queues outside may find themselves having to turn customers away, limiting revenues further.
To weigh up the risks and rewards involved in reopening, three-way forecasting can provide a valuable decision making tool. A three-way forecast integrates a company’s forecast profit and loss, balance sheet and cash-flow, which allows businesses to understand the full impact that certain decisions may have on their business, rather than purely focusing on the cash-flow aspect.
While a short-term cash-flow is important, so that businesses understand any payments and receipts due imminently, long-term planning at a time like this is key. Therefore, businesses should consider looking at least two years ahead, to understand what position the business may be in when deferred payments fall due, and the benefit of being able to furlough staff comes to an end. By building in data for both possible scenarios – the store reopening or staying closed – it will allow businesses to make an informed decision, and to stress test this decision.
Where possible, it is important for retailers to focus on online sales channels, particularly for those who decide that it doesn’t make financial sense to reopen for the time-being. However, such changes are likely to have implications for other areas of the business, such as the need to invest in more robust logistics infrastructure and website capacity. As such, it’s important to remember that this strategy won’t work for every retailer and must complement the owner manager’s overall business model.
Owner managers need to weigh up the pros and cons of reopening stores, and to seek specialist advice where required; for example, in building robust financial forecasts to enable businesses to make informed decisions, and from HR specialists when it comes to making decisions about staff changes.
Over the last few years, the retail sector has been forced to adapt to significant changes in consumer behaviour and it’s likely that the coronavirus pandemic will further accelerate this transformation. By taking advantage of three-way forecasting and considering their options carefully, retailers can reopen at the right time and in the right way, protecting their financial position.
By Sadie Channing, a senior manager and retail sector specialist at accountancy firm, Menzies LLP.