James Robbins and Benjamin Hughes from our insolvency and debt recovery team look at how businesses can protect their finances during the COVID-19 pandemic and put measures in place to come out of the crisis as a stronger business.
Last updated 25 March 2020
As countries around the world attempt to weather the storm of uncertainty as a result of COVID-19, it has become increasingly clear that all aspects of the economy will be affected.
And businesses that were already struggling with cash flow before the advent of this contemporary global crisis are likely to be worst affected.
These are unprecedented times and businesses will need to adapt to avoid becoming insolvent. Here’s some practical steps businesses can take to prepare for a potentially bumpy road ahead.
Make the most of the business support on offer
The government has announced various measures to support businesses during these difficult times and our previous blog details the coronavirus business support announced so far.
During this time, it may be necessary for businesses to request mortgage deferrals or enquire with landlords about a rent repayment holiday, or any further agreement to reflect the business’ current circumstances. Even if this cannot be agreed, the government is to introduce a moratorium, which will prevent landlords, for at least three months, from repossessing commercial premises for non-payment of rent.
Times like these are a reminder for businesses to ensure they have appropriate insurance cover, especially with respect to business interruption and any potential reputational or crisis management issues. If your policies do provide cover for these types of unprecedented events, make sure you know when and how to rely on them. Insurers are being encouraged by the government to make pay-outs on business interruption policies.
Prepare for a worst-case scenario
One of the best ways to be prepared during these uncertain times is to create a realistic budget forecast of what income the business is likely to realise during this time. It is worth keeping in mind that other companies may struggle to settle invoices during this time, so look at the minimum your business will need to collect to continue trading. A budget should also indicate where you’ll need to implement credit control procedures. Such a strict budget will reveal both which sources of income are crucial to your business, and where you may be able to reduce costs.
It may become necessary to restrict all non-essential expenditure in the following months, including business expansion plans or luxuries afforded to staff. Working hours should be reduced only where this does not produce strain on other members of staff or leave work incomplete. Costs should be stripped down to the bare minimum to continue trading at a profit without affecting staff members.
It is pertinent to keep everything in evidence and keep good records, to make sure that all business decisions, agreement and contracts are well-evidenced. This should help ward off any potential disputes over invoices, which will allow your business to trade more smoothly. Records of internal business decisions based on your realistic budget will allow you to keep track of the progress of the company for the foreseeable future. These records may need to be heavily relied upon should your business become insolvent.
Make cashflow the priority
Poor cashflow will ultimately be the downfall for many businesses. It follows that businesses need to re-double their efforts to ensure that cashflow is healthy. Businesses should make sure they have a strong credit control procedure in place to remind those who have been invoiced for work undertaken or goods provided. There are a few simple procedures which should help ensure healthy cashflow:
- Reminder letters. It’s important to make sure that invoices reach their addressee, as many of the cases solicitors can end up working on involve companies simply being unaware of the debts owed. Further, should it come to involving legal proceedings, it is helpful to evidence multiple requests for payment.
- Clear Invoices. Clear and simple invoices should ensure that there is no confusion and give the addressee very little scope to dispute an invoice. Invoices should always have a date, reference number, and a description of the work undertaken/goods supplied and if possible, the dates for these goods and services. Undisputed invoices provide solicitors with an added, often cheaper weapon of issuing a statutory demand for payment, without having to issue winding-up proceedings against a struggling company. Further, ensure that invoices are pursuant to your terms of business, and that these were agreed to before undertaking work.
- Credit checks. Where possible it is prudent to carry out credit checks on potential customers and clients and use this information to avoid carrying out work for companies with a history of bad payment. Further, request payment on account where it is feasible.
Failing this, solicitors will be able to issue a final demand for payment giving a debtor one last chance to settle any outstanding invoices before issuing legal proceedings against any debtors. The threat of any legal proceedings, whether in the form of county court or insolvency proceedings, can often be as effective as the proceedings themselves.
For undisputed debts, solicitors would also be able to petition the court to ‘wind up’ a company, if it cannot afford to pay its debts. It must be established that there is no legitimate dispute over the debts and proven that the company cannot afford to settle any outstanding invoices. However, winding-up proceedings are a draconian remedy and you may not recover anything if they genuinely cannot pay and a winding-up order is made.
Many businesses will be struggling at this time and it may therefore, at least initially, be more cost effective to be communicative with your debtors and agree a payment plan before incurring legal costs in pursuing debts that struggling businesses cannot afford to pay.
Being aware of your business’ options in these uncertain times may be the difference between survival and insolvency, and hopefully this article will help you to keep trading and providing an income for your workers and staff members.