Survival of the fittest, now more than ever
Published in the Sunday Business Post on 29 March 2020
Business owners face an uncertain future. It is clear that by the end of the current crisis, almost every business will have lost at least two months’ income, probably more.
When the public health crisis ends there will be at least half a million workers laid off. There is no certainty about how many of these will return to work, and over what timeframe. This means that consumer demand for every category of goods and services will remain depressed, as households struggle to rebuild their balance sheets and are wary of committing to all but essential expenditure.
The inevitable consequence is that many businesses will be crippled, and others will fail outright. Of course, there will be a third category who recognise that every crisis brings opportunities, and thrive by grasping those opportunities when the time comes.
What will distinguish the winners and the losers will be planning and cash. Incurring losses is bad for business, running out of cash is fatal, but no amount of money will save a business that doesn’t have a good plan for how to use it well.
Owners of small and medium enterprises could easily be consumed by dealing with the immediate crisis and not plan for their survival after trading resumes. We are about to enter into a period of accelerated evolution when businesses that conserve cash and plan for the future will survive, and those who don’t become extinct. Businesses that become extinct will free up talented staff and other resources that will be put to better use by the survivors.
The first step towards surviving the crisis is for business owners to know precisely where they stand. This means much more than having up-to-date management accounts. It also means analysing debtors to see when and if they will pay, and by how creditor balances can responsibly be extended. Having done that it will be necessary to prepare cashflow forecasts for both optimistic and pessimistic scenarios. In many cases the outcome of this exercise will paint a bleak picture and it will become apparent that drastic measures need to be taken now.
Any business with a book of debtors needs to chase them hard. A natural instinct might be to give debtors a break in the interest of a longer relationship, or to simply accept that they are in difficulty and can’t pay at the moment. That instinct is a folly. Where cash is short, the one who shouts the loudest gets paid. Debtors who don’t pay soon are unlikely to make full payment in the future, so it might be worth agreeing discounts for immediate payment.
The other side of the cashflow equation is payments to creditors, including suppliers, taxes and lenders. Many businesses simply won’t have enough cash to pay creditors as they fall due. Business owners need to be organised in deciding to whom and when to make payments, instead of reacting to the creditors who shout the loudest.
It will be necessary to distinguish those creditors who must be paid to keep the lights on, from others to whom payment might be deferred or scheduled over a longer period. Trade creditors might be persuaded to accept a percentage of their debt now with the balance to be paid in instalments commencing when Covid-19 restrictions come to an end.
In the current environment, banks and revenue are likely to reluctantly agree proposals to defer payments falling due and to extend them over a longer period. It is important to stress that getting agreement on this means putting a proposal to the creditor and not just cancelling the direct debit, which is more likely to get a negative reaction.
It is unlikely that simply stretching out cashflow will be sufficient to save many businesses, and cutting costs will be essential for survival. In circumstances where many businesses have almost completely ceased trading, this means tackling overheads. The two main categories of overhead that can be reduced are rents and payroll costs.
Rent is the more difficult overhead to reduce, as landlords may need their bank’s consent to the reduction. This means that the proposal put to landlords will need to include detailed financial information so that the landlord can explain to their bank that their tenant is unable, and not merely unwilling, to pay and that the inability is likely to be temporary. It probably makes sense to look for a rent reduction for a period of months, and look to revisit this if the need arises in the future.
It is essential for employers to reduce their payroll costs, where continuing to pay employees who are not working would drain cash to the extent that the business becomes insolvent. Employees are likely to recognise that their employer cannot continue to pay them whilst trading is at a standstill.
The government, for its part, has softened the blow here. The well-publicised 12-week scheme to make €350 per week available for employees who are laid off, and contributions of up to €410 per week for employees who are retained by affected employers. It is essential that employers operate the correct procedure here and issue proper notices of lay-off/short time to affected employees, or document agreements to reduce wages. Failure to do so might result in employment law claims in the future, for the amounts by which wages are reduced now.
Taking these steps now will give businesses a prospect of surviving the present crisis. Having prepared for survival, business owners need to be alert to opportunities to thrive in the aftermath of the pandemic. Every business will have competitors that either do not survive or are open to being acquired in a buyer’s market. This will create opportunities to acquire additional market share, premises and equipment at favourable prices.
It may be that the steps described here are not sufficient for a business to stay solvent or that the business is no longer viable. In these circumstances, some sort of insolvency outcome is inevitable. Businesses that are fundamentally viable but suffer once-off losses or cashflow problems may be able to write off part of their debts through a formal scheme of arrangement. This involves circulating a proposal which, if approved by 75 per cent of creditors who respond, becomes binding on all of them. The Companies Act 2014 introduced a provision enabling state bodies, including the Revenue, to agree to these schemes. If a scheme of this type is needed, then it is best done whilst the memory of the events that made it necessary are fresh in creditors’ minds.
Of course, if a business is no longer viable, then it is incumbent on the directors to put it into liquidation at the earliest possible opportunity and to avoid doing anything that prejudices creditors. It is essential that directors behave responsibly in these circumstances, as otherwise they risk being subject to restriction orders or made personally liable for company debts.