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By Bev Budsworth, MD of the Business Debt Advisor

Covid Crushed (Zombie) Business

I am not a fan of the term “Zombie”for a business but it does paint a picture. There have been many articles written about Zombie businesses over the years. The term originated in the 1980’s with economists referring to debt bloated Japanese businesses who received consecutive bailouts from government banks to keep the organisations afloat. The justification was to keep people in work and lessen the blow of the recession on the Japanese economy.

These Zombie branded companies are laden with debt but have just enough to cover expenditure and interest but insufficient to make a profit or look to invest in expansion or contribute to economic growth. They are on an economic hamster wheel and the pandemic is likely to crush many of the pre-covid debt laden entities and create many new entrants.

Covid Crushed Economy

The pandemic has contributed vastly to the economic decline of 2.2% in the 1st quarter of 2020 which was the worst drop for the economy in 41 years.  But this was barely a tenth of the size of the contraction, according to ONS figures for April 20 – a staggering 20.4% – the largest drop in a single month since records began. As a comparison, during the credit crunch of 2008 UK GDP shrank by no more than 1% in any one month. The figures for May 20 have shown a small uptick of 1.8% – a lot more upticks are needed just to achieve the OBR’s longer term prediction for 2020 of a 12.4% decline and this would mark the biggest economic decline in the last 300 years.

Covid losses for Small Businesses

The government has brought forward plans to “build, build, build” with £5bn of infrastructure spending. This does not compare with the estimated £69bn that small businesses will lose as a result of Covid. According to a survey by Small Business, the average loss likely to be suffered by small businesses is £11,779 which includes lost work and revenue. Of the 3,700 businesses surveyed – 4% have already permanently closed and a further 40% fear they are at risk of permanently closing. Considering that there are 5.8 million small to medium sized businesses, there are millions of businesses who fear they may not recover from the affects of Covid.

According to a You Gov survey, 35% of business leaders believed that 20% of their staff may be cut following the end of the furlough scheme in October 20 with 20% believing the numbers they would need to cut would be above 30%.

Recovery plan for the Covid Crushed Businesses

Continue to keep your staff safe

As businesses make plans to return to work, it is vital to undertake a return to work safety assessment.  You have a duty to ensure, as far as reasonably possible, that you do not expose your employees to risks to their health, safety and welfare. If your team do not feel that you have put in place adequate measures to ensure their safety, your recovery plan will fail. If you do not have specialist health and safety advisors, there are downloadable guides.

Communication with your customers and employees

Customers need to be kept informed of your plans to reopen and what core or new services you are providing. Keep your employees informed of the changes you are making to your business and if possible involve them in your decision making processes. If possible set up surveys to get feedback on the changes you have made.

Apply for Crisis Assistance

The Small Business Review referred to above has found that over 50% have been able to access help through the variety of government initiatives. Small Business has set up a Support Checker for businesses that have found the support difficult to access.

The Bounce back loans scheme will be available until 4 November 2020.  As long as your company did not fall into the category of being a “Business in Difficulty” at 31 December 2019 and has been trading for at least 2 years, the loans are relatively easy to access.

The CBILS loans continue to be available. You will need your accounts to be up to date as well as a Business plan that incorporates projected profit and loss and cash flow for at least the next 2 years.

As at the end of June 2020 it is estimated that 9.3 Million people had been furloughed. There is no doubt that the scheme has been a lifeline for thousands of businesses helping them protect jobs. According to data from The Treasury, as at 28 June 20 £25,5BN had been paid in wage subsidies with a further £7.7BN of financial aid paid to the self employed. The support from the furlough scheme will reduce materially from August onward.

Help with Redundancy Payments

I have drafted a separate blog about redundancy payments and what you can do if your business cannot afford to fund the cost. It is possible to get financial assistance from The Insolvency Service but this will have to be paid back.

If your company needs to consider a formal insolvency procedure as part of the reconstruction, the RPS will cover employees’ claims as long as the company properly operated payroll for its staff which is either PAYE or the CIS scheme.

If you need to bring back your team from furlough on a phased basis and you are keen to keep control of your business, whilst implementing a cost cutting exercise, a CVA could be appropriate.

It’s vital to get practical and sensible advice if your business is facing challenging trading conditions which needs to include downsizing some or all of your team. We appreciate how stressful it is and with our experience and skill, we will help you get through the process.

Ask HMRC to defer your payments

The government has rolled out deferral of a number of taxes. This includes June 2020 payment on account of Self Assessment tax which needs to be cleared before 31 January 2021. If you are worried about accruing arrears which you will then not be able to pay, you can set up payments plans online.

If you’re a UK VAT-registered business that deferred VAT payments between 20 March 2020 and 30 June 2020, you now need to:

  • set-up cancelled Direct Debitsin enough time for HMRC to take payment
  • continue to submit VAT returns as normal, and on time
  • pay the VAT in full on payments due after 30 June

Any VAT payments you have deferred between 20 March and 30 June should be paid in full on or before 31 March 2021. For more information see Pay your VAT bill.

If your business has arrears of PAYE/NIC  or Corporation Tax set up a Time to Pay plan with HMR & C. If agreed this will allow your business to pay the arrears in installments. If you have not received a demand letter than you need to contact the Payment Support Service on 0300 200 3835 between the hours of 8.00am and 4.00 pm. If your business has received a demand call the number on the letter.

If HMRC believes that your company is nearing insolvency, they may act quickly to recover their money, so a TTP arrangement is only for those businesses that are fundamentally profitable. You need to be proactive and not just wait for HMT & C to chase you for late payments.

Improve your credit control

The Federation of Small Business has produced a guide to making your business better by getting paid on time. The Guide is free but you do need to sign up to their newsletter.

The guide includes very sensible advice such as:-

  • Check out the credit risk of potential clients
  • Get invoices out on time and put effort into the design of your invoice
  • Have a rigorous plan for chasing late payment and stick to it
  • Shorter payment periods – if clients need an urgent service its only fair they agree to shorter payment terms

13 week cash flow forecast

A cash flow forecast covering a 13 week period (a financial quarter) is your map for safely navigating through the next few months. It will help you plan ahead and be proactive about your financials rather than reactive.

Its vital you forecast in weeks to accurately plot your cash movement. If you just look at monthly totals, you cannot see the timings of your cash movements which could land you in trouble.

There is a very handy blog by BRIXX a clever team of software developers

Review your expenditure

While you are pulling together your 13 week cash flow, make a note of expenditure items that need a review. Working remotely has forced many businesses to embrace technology with a resultant saving in printing, postage and document storage. It makes sense to continue these smarter ways of working and look to get rid of unnecessary expenses.

So open up your online banking, go to the Direct Debits tab, and review each and every supplier to see if you could be getting a better deal elsewhere, or if you can ditch them entirely.

Successful recovery will depend on a well thought out and planned plan and an enormous amount of dedication by business owners who need to get the buy in of their team.

Getting help from The Business Debt Advisor team

If you have any queries please fill out our Contact Formand we will be in touch.  Alternatively, call our FREE ADVICE LINE on 0800 781 0990.  Our team has extensive experience in helping businesses restructure either with or without an insolvency process.

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