Text in Purple denotes an Update made on 26 March 2020
A few businesses will be thriving during the Coronavirus pandemic, as turnover is driven to them, but most will be experiencing a reduction in business and wondering how they will survive. This advice note is for them.
The overriding principal, in this type of crisis, is to stop measuring your business in terms of profit but instead worry about cash. A lack of cash will close the business much quicker than a lack of profit, and therefore the most important report that you should have produced, is a forecast cash flow.
The UK Government has announced a number of measures to assist businesses to survive this crisis. Dixcart has produced a summary of these, which can be found here and we will endeavour to keep this summary up-to-date, as more assistance or changes to the assistance are announced. We will therefore not repeat these here.
Every business should take advantage of some of these measures. You will only know which are appropriate for your business, by having a senior member of your team go through them all, to decide which will help you. Following this an action list should be produced and quickly undertaken, to take advantage of the government measures.
As further measures are announced, these too should be reviewed to see if they are helpful to you, and appropriate action quickly taken.
On the 25th March, the government announced that companies were to receive a 3 month extension period, to file accounts during COVID-19. Whilst this is useful – this definitely isn’t time to – NOT keep records up to date. After all, if you do not know where you are, how are you going to know where you are going? In the current crisis, business and most importantly cash is reducing quickly, and you must stay on top of record keeping to know what is happening. Whilst the government is giving extra time to pay taxes such as VAT they are still expecting the returns to be completed on time. Please see the VAT section in this article.
You will also require your latest accounts and management accounts, if you are going to apply for loans (please see below), or to ask for extra time to pay landlords and/or other lenders and creditors (please see below), as they may well ask to see them. It is therefore important to have accounts prepared and records up to date
Dealing with Banks and other Financial Lenders
Although banks are not normally very helpful when there is a downturn in business, the ‘Coronavirus Business Interruption Loan Scheme’ is likely to mean that they will be willing to assist through this crisis. This is available through your normal bank, but the credit risk is being taken by the government and the loan will be interest free for the first 12 months. If you need additional funds this should be where you turn to first. You will of course need a plan to explain how the loan will be repaid in the future.
If you use factoring or invoice discounting, do not assume that the historic facility levels will be available during the crisis. Normally the level of borrowing is limited to a percentage of the invoices that the bank will allow to be included in the discounting. As your sales fall, the invoices available will reduce and so will your facility. In addition, the banks will normally restrict the age of the invoice that can be included, therefore as payment slows and debt ages, invoices can fall outside the limit, further restricting the amount that can be borrowed. The banks also have a habit of restricting further which customers’ invoices they will allow to be used in the facility.
If you use other funding such as leasing equipment, or have a mortgage on your property, talk to relevant lenders and see if they will give you a payment holiday. This will not come without a cost, but reducing the cash outflow is the important consideration.
Dealing with your Landlord
If you do not own but rent your premises, speak to your landlord and try to negotiate a reduction in your rent for a period; again there may be a long term cost in doing this, but the landlord will not want an empty property at present, so it is in their interest to help keep you in business.
On the 23rdMarch the government announced that commercial tenants who cannot pay their rent because of coronavirus will be protected from eviction.
The announcement stated:
- Commercial tenants who cannot pay their rent because of coronavirus will be protected from eviction.
- Many landlords and tenants are already having conversations and reaching voluntary arrangements about rental payments due in the near future, but the Government recognises that businesses struggling with their cashflow, due to coronavirus, remain worried about eviction.
- These measures, included in the emergency Coronavirus Bill currently going through Parliament, will mean no business will be forced out of their premises, if they miss a payment in the next three months.
- This builds on the unprecedented package of support announced for businesses who are affected by coronavirus.
- Commercial tenants will still be liable for the rent after this period. The Government is also actively monitoring the impact on commercial landlords’ cash flow and continues to be in dialogue with them.
If sales are falling, look to see what could be done to reverse the trend, but be careful with the credit that you are extending. Having extra sales is of no use, unless it is paid for and hopefully meeting the agreed terms. Sales people often do not think about the recoverability of debt, only getting the sale, so emphasise the importance of cash and do not pay commissions until the invoice is paid.
Every cost should be reviewed to see if the service is still needed, or if it can be obtained for less cost. As an example, if the premises are empty does the heating need to be on, or on as high as normal? Are the lights all off? If you are paying for the service based on last year’s usage, which is only adjusted at the end of the year, try for a reduction now. Many costs are related to how busy the business is, but the cash out flow does not necessarily fall as quickly as the inflow.
If there are any capital projects, such as new plant or vehicles planned, review these to see if they can be cancelled or deferred. Review any maintenance and other none essential work to decide if it can be postponed.
The most emotional area is dealing with employees and no one enjoys telling members of staff that they no longer have a job, but the salaries are normally the largest cost to a business, and therefore cost savings in this area must be considered. There are however a number of alternatives when cutting the cost of employees and they should all be considered. Especially the new ‘Coronavirus Job Retention Scheme’ that the government announced last week, more about this scheme can be found here.
Before deciding on a course of action, consider what is happening to the business. If orders are falling, then the staff dealing with deliveries may be short of work. At the same time the sales team may be working harder than normal and it could be counterproductive to cut staff here. Look at this area by area.
For departments with a shortfall of work consider the following:
- Redundancy. It reduces costs permanently, but normally takes a month or so before the effect is felt. It can be costly to action and it reduces the work force permanently, so you could be short of skilled staff when the upturn comes.
- Reduction in the hours worked. This cuts costs and any excess capacity, but it has to be agreed with the staff affected.
- Coronavirus Job Retention Scheme. The government will pay 80% of the salary cost up to £2,500 per month. The employee has to be not working, due to the impact of Coronavirus, but retained on the payroll and agree to be involved in the scheme.
For other staff, consider asking them to accept a voluntary reduction in pay. Again, the staff have to agree to this, but during a crisis period, employees can see that without a reduction in costs the business will probably go bust. The scheme needs to be fair and led from the top.
Any changes to working hours or pay rates needs to be both fair and legal. We suggest that you seek the advice of an employment lawyer, before any action is taken.
Dixcart has lawyers, accountants and tax advisors that can assist with all aspects of a review being undertaken by a business, when considering what action they must take to survive the coronavirus crisis. We can also provide support and assistance in putting in place the appropriate action.
If you would like to discuss your plans with one of our directors, please call us on: 0333 122 0000 or send an email to us at firstname.lastname@example.org. If you are already a client, please ask to speak to your usual Dixcart contact.