Directors can ‘Hope for the Best’ as long as they ‘Plan for the Worst’

Johnny Abraham of J9 Advisory, a Chartered Accountant with over 19 years of experience in Business Funding, Rescue and Restructuring, on why it is essential to gain the right financial advice to guide businesses through the turbulent times ahead.

It’s been more than six months since Covid-19 hit the world, and as a nation we are still experiencing levels of uncertainty and disruption not seen for generations.

Historically, by now we would have seen financial ruin all around us, however, so far, British businesses have been provided with previously unseen levels of support including Capital Repayment holidays from most funding institutions, grants, loans, the Job Retention Scheme, the ability to defer HMRC liabilities and the other protections included within the Coronavirus Act 2020, to name a few.

Whilst necessary, due to a significant level of pain being relieved by the above, (none of which can continue indefinitely), these support measures have led to a certain level of false security.

Although Rishi Sunak’s announcement on 24 September 2020 and 9 October saw certain positive actions, the change from Job Retention to Job Support Scheme in effect forces directors to start making some very difficult decisions within their businesses; whilst his speech on 5 October 2020 clearly portrayed a message of difficult times ahead.

What’s in store for businesses over the next six months?

September will for some have seen the last month of capital repayment holidays from funders, and the Q4 2020 Rent payable, however, the Commercial Eviction Ban that was due to end on 30 September 2020 was extended until 31 December 2020, as were the restrictions on Statutory Demands and Winding up Petitions,  which were also due to expire at the same time.

Whilst bringing comfort for a further three months, these measures will not deal with the underlying financial issues attached.

One initiative that has not been extended is the relaxation of the Wrongful Trading provisions, which have now expired.

The clock is therefore certainly now ticking for directors to take action, especially where there are questions surrounding the viability of their business.

Directors in such a situation should be seeking Professional advice as soon as possible, and ensure that they are documenting their business decisions and the thought process behind them.

October is the last month that businesses will receive support from the Job Retention Scheme.  Whilst this has been replaced by the new Job Support Scheme which will run for six months from 1 November 2020 to 30 April 2021, they are two very different schemes.

In short, a business can no longer just furlough unrequired staff, unless their premises is legally required to close.  Financial support will only be given for employees who are working at least one third of their normal hours (the hours worked will be paid for in full by the employer), with financial burden of the remaining unworked hours being shared by the employer, the Government (subject to a monthly Grant cap per employee), and the employee.

This will mean that from 1 November, businesses will suffer an increase in the effective hourly rate paid for the hours employees have worked.  This is something that directors need to be reviewing now in terms of their financial forecasting, as for some, it will be the difference between trading profitably or at a loss, especially under current difficult trading conditions.

A further announcement on 9 October 2020 detailed an extension to the Job Support Scheme. However, this will only apply to a business whose premises are legally required to close due to any national or localised winter restrictions that may be enforced, under the new proposed three tier system announced on 12 October 2020.

The extended scheme allows Directors of eligible businesses to furlough staff, with the Government providing a grant of 67% of wages (subject to a monthly earnings cap).  The business will need to meet the Employers NI and Pension contributions.

In addition, there will also be a monthly Grant of up to £3,000 for these businesses depending on the rateable value of their premises, and will be payable fortnightly after two weeks of premises closure.

For a lot of businesses, VAT payments are due in November to add to cash pressure.

December is currently still set to see the return of HMRC’s Preferential Status in insolvency cases.  This will have a negative implication on certain funding facilities which rely on the security of floating charge assets.  Affected businesses should have been contacted by their funders about this by now with regards to any funding facility changes that will need to be included in financial forecasts.

Christmas normally brings a two-week shut down in a number of sectors, which has a knock-on effect in the supply chain and places additional pressure on already distressed businesses, due to the reduction in turnover that is suffered.

To make matters worse, the Q1 2021 rent is also payable at the end of the month.

A lot of businesses suffer lethargic starts to the year, as people return to work in January, which again adds to cash pressure, and for many, the Q4 2020 VAT will be payable in February.

In March 2021 the Bounce Back / CBILS monthly repayments are due to start, however the update on 24 September 2020 means that there will be an option to have a period of interest-only payments or a payment holiday, together with the ability to extend the repayment term from five to 10 years.

HMRC debt deferred from Q1/Q2 2020 was due to be payable, however, this can now be paid over 11 months via a self-service portal.

Financial forecasts and operational strategy need to be actioned now

Given the above and the already stressed/distressed position of a lot of businesses, directors can ill afford to just hope for the best, and should not assume that extra support from the Government will be forthcoming.

Directors must ensure that they are producing, and regularly updating, detailed and prudent financial forecasts, together with an operational strategy to see them through the next 6 to 12 months without any surprises.  This exercise allows directors to plan in advance for their cash requirements whilst also providing the information required to review their business options and make decisions sooner rather than later.

Communicating with Key Stakeholders and securing those relationships will also form an important part of strategy planning.

Engaging with a Professional to assist with this planning can not only lessen the burden, but also offer wider experience and expertise, whilst bringing a completely independent and emotionally unconnected point of view to the table.

Far too often however, we see directors and their businesses being led down the wrong path by unqualified, free or cheap, “Brokers/Advisors/Consultants,” and for some reason the logical thought process of “where is the catch”, is ignored to their detriment.

It’s imperative for businesses to seek advice from industry experts

Dr James Callaghan, Regional Director for the ICAEW commented, “Now more than ever, businesses need sound professional advice to ensure they are optimally financed and structured to emerge from the current challenges able to thrive and grow in the future.

“I would encourage any business thinking of seeking advice to always look for someone who has a professional qualification. Appointing an ICAEW-regulated firm will ensure you are taking advice from someone who is qualified, committed and accountable.

“Firms who are part of the ICAEW Business Advice Service (BAS) will provide any business with a free initial consultation.”

The Institute for Turnaround commented, “The IFT is the leading membership organisation for turnaround professionals. All IFT members undergo a rigorous accreditation process requiring the demonstration of expertise and a track record of success through referenced case studies, the endorsement of independent sponsors and a formal interview with IFT Accreditors completes the membership accreditation process. All IFT members sign up to a rigorous code of conduct.

“Last year we estimate that our members saved in excess of 200,000 jobs and £2bn in enterprise value working with UK businesses.”

Questions to ask before you select an Advisory Partner;

Who exactly will you be dealing with?

Is the person qualified to give the advice required, if so with who?

Do they have the relevant professional experience required?

Are they independent?

Are they a member of a regulated professional body (which would also give you wider assistance should there be any issues)?

If there is an offer of “no cost to you” assistance…where is the catch?  There will be one.

Now is the time to take action.  Hope for the best, but ensure you plan for the worst.

J9 Advisory is an ICAEW firm and Johnny Abraham is a Fellow Chartered Accountant and an Accredited Member of the Institute for Turnaround with over 19 years of experience specialising in Business Funding, Rescue and Restructuring.   Should you wish to arrange an initial consultation please email info@j9advisory.com or visit www.j9advisory.com