Recent research, as well as common sense, shows that business insolvencies are set to increase dramatically in the next few months. Yet many businesses are still trading on the same basis now as before the pandemic. In many cases they’re unconsciously supporting customers at the risk of their own financial future.
Spending some time now to consider the following could make a significant difference to your ability to be one of the survivors over the coming six months…
UHY Hacker Young recently reported that their research suggests 3,300 UK business collapses are stored up for when the moratorium on insolvency actions ends on 31st December. The ban on creditors petitioning to wind up companies has prevented many businesses that would have failed, even before the pandemic hit. Business insolvencies between April and October this year were 36% lower than the same period last year (6,419 this year compared to 10,076 last year). The average number of insolvencies in the same period over the last five years was 9,777.
Deloitte recently reported the 8.4% of UK firms have less than one month of cash reserves and 14% of businesses have little or no confidence that they will survive until February. An analysis produced by their Restructuring Services division estimates that insolvencies could rise by almost 60% in the first half of next year.
HMRC are moving from a ‘non-preferential creditor’ to a ‘preferential creditor’ status. This means that they have first claim on any funds a business may have, before any other creditors. This is also likely to mean that HMRC will issue more winding up orders than they have done previously. It is also likely that finance applications may be rejected in future if there is a large amount owed to HRMC, as lenders will be below HMRC on the list for any payout. Finally, HMRC could block the granting of any CVA for a struggling company.
What MIGHT happen?
It’s possible that guidance from the Government will prevent HMRC closing businesses who cannot meet tax payments once the moratorium ends. The ability to spread tax payments will help, but some of these businesses, particularly in Construction, Retail and Hospitality, who’ve been unable to trade for much of the year, simply have no cash to make any payments at all.
The government has already confirmed that the ban on evicting commercial property tenants will be extended for the final time to 31st March 2021.
The courts have enormous backlogs of cases that are log jammed. Any actions that are underway already are moving at a glacial pace, so any new ones will be behind those in any queue. Depending on your perspective, this could be a good thing or a very bad thing, but the end result is that it’s going to be impossible to know what the true landscape looks like for a long time.
What should you do?
1 Your cashflow
We’ve talked before about the importance of having a cash flow forecast for the next three to six months so that you can see where you may have gaps. Any business can get free access to Fluidly, a three month cash flow forecasting tool that integrates with Xero and Quickbooks. There’s a raft of information in our Rebound Resources that can help you get to grips with your cash flow.
You could create different scenarios to see what impact another enforced period of closure might have, or what would happen if 30% of your customers stopped paying you.
This will enable you to see whether you may need to explore the current finance options, before solutions such as CBILS disappear.
2 Your terms
Your current terms of business do NOT have to be the same as those you had back in March. You can ask for deposits and stage payments, and payments before delivery or by Direct Debit. You can have different terms for domestic or commercial customers, new or existing customers.
You do not have to give credit to people whose financial stability is a total unknown. There are options online to credit check potential customers before you give credit, but bear in mind that many of these will be based on old accounts, that may well bear no relation to the current business situation.
3 Your processes
Once you’ve secured a customer, and agreed terms, you can put yourself in a strong position by making your delivery processes as efficient as possible. Incurring less costs means more profit, and often, more profitability too!
We’ve seen several businesses this year who’ve trimmed headcount and finished the year with lower sales as a result, but higher profits.
The key process in terms of credit and finance though, is your credit control process. Too many businesses have a rough idea of what they do when they don’t receive payments, but it’s a little hit and miss, and the day to day takes over.
Getting your credit control process running like clockwork could make all the difference to your success over the next six months.
It’s not enough to have someone who fits in credit control when they can any more. It needs to be front and centre as a key task that gets proper focus. As a business owner you need to lead the way with that and make sure that you are keeping it top of mind too.
If you show no interest, why would anyone think it was important?
So what can you do?
1 Review our Rebound Resources for a guide to your Debt Collection process.
2 Consider automating your collections process, as well as setting up and using the reminders in Xero or Quickbooks if you aren’t already. Simply using an App that chases the debts until 45 days can have a significant impact on your debtor days. When we first started to use Debtor Daddy in the old business, our Debtors dropped like a stone, which was great for me as I had FAR less to chase!
Businesses in trouble will pay those people that shout loudest, so make sure that you’re one of them!
3 Take a look at the resources on Chaserhq.com. There are some really helpful templates and guides like this one, that gives you a number of scripts to use on telephone debt chasing calls. If your debts aren’t chased because you (or your team) aren’t comfortable in making the calls, this could help.
4 Move to Direct Debit or credit cards for payments if at all possible, and don’t assume that it isn’t! When we moved the clients in our previous business across to Direct Debit, only a small handful blinked. The others accepted it as the way we do business, and this time around, ALL of our clients pay by direct debit as it’s easier for everyone, faster, and there’s no admin requirement, and no debtors to worry about.
Even if you don’t move existing customers, new customers know no different and will accept it as normal. We’re back to you having different terms for different customers, but it works!
We’ve talked in previous posts about the importance of getting your CBILS or Bounce Back loan application in sooner rather than later if you think you may need finance in the next six months.
Both CBILS and Bounce Back loans have just been extended to the end of March 2021, but leaving your application until the last minute will not be helpful for anyone! The alignment of the cessation of these schemes with the Spring Budget may suggest that change is coming.
Before the announcement of the CBILS / BBLS extension, there was talk that there will be a successor option to CBILS, BUT there has been no announcement as yet, there is no guarantee that the terms will be in any way comparable and the lending landscape will not remain unchanged indefinitely. The information we’ve heard is that ‘CBILS 2.0’ will include the option for banks to ask for a Personal Guarantee, and will NOT have any kind of payment holiday or Government paid interest period. This may not materialise, but we cannot expect the very affordable options that are the current CBILS and BBLS to remain available indefinitely.
One of our finance contacts said this week ‘the days of no Personal Guarantees and no security will be far behind us’.
CBILS and Bounce Back loans present the best option for finance at the moment, and, given their terms, there is an argument to suggest that any business that isn’t absolutely sure that they have sufficient cash reserves to get them through a worst case Coronavirus / Brexit Q1 should be considering an application.
Giving some thought to all or any of the above would be a really smart way to spend some of your festive period. We all need a break after the roller coaster ride we’ve been on since March, but we haven’t come through that to stop fighting now, and we’ll need our wits, and finances, about us to make sure that we don’t become a statistic next year.
We’re not through the worst yet, but there is (thankfully!) hope of better times on the horizon.
The suggestions above should help ensure that your business is able to take advantage of those better times, without getting taken out by other people’s failures to plan effectively.
This is all about protecting your business to get through, and a little time spent on the above will help. As ever, if you need our support in any way, please get in touch; we’re here to help!