Coronavirus and business survival - PKF Francis Clark
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Coronavirus and business survival

Against a backdrop of a slowing world economy and political uncertainty Covid-19 has emerged as a huge threat to businesses all over the world. Whilst the numbers affected in the UK remain low in relation to other countries they are increasing, leading to worries that restrictions similar to those applied in Italy may become necessary here.

It may be a temporary phenomenon and as yet its impact is uncertain.

Both the Chancellor and the Bank of England have now put in place strong measures to try to alleviate the likely economic consequences. The budget speech referred to the possibility of as many as 20% of employees being off work with dramatic effects on both the supply and demand sides of the economy.

On the monetary side, the Bank is trying to encourage lending and liquidity by reducing interest rates and releasing banks from reserve restrictions.

In his budget speech the Chancellor has put in place changes affecting both liquidity (deferment of tax, government guarantee of 80% of support loans and SSP changes), and direct cost cutting and support (extensions to rates relief, £3,000 grants to small businesses and better benefits for the self employed), with the focus being on small businesses.

All this will help but will it be enough? How should small businesses navigate through the crisis?

It is important to be clear on the realities of the assistance being offered. The reduction in real costs such as rates is very welcome. Deferment of liabilities is all very well, but under a Time To Pay (TTP) agreement the business will have to pay both the deferred and current tax liabilities when the TTP comes to an end. Similarly, a support loan will enable creditors to be paid when the loan is made, but the loan will have to be repaid in due course.

The key point is that if the business will incur losses during the crisis it needs to be clear how those losses are to be funded in the short and longer term.

It is, therefore very important that businesses make a reasonable attempt to forecast their financial needs during the crisis and whether, when the crisis is over, enough cash will be generated to deal with any loans or deferred liabilities. This will be difficult given all the uncertainties but there is a personal risk to directors if they are considered to have traded on without reasonable prospect of the business surviving, and it is far better to have a forecast that proved to be wrong than no forecast at all.

If the forecast shows that the pressures arising in the short term are not manageable then some restructuring of formal process to deal with creditors will be necessary and advice should be taken as soon as possible – there are more options if matters are addressed before cash flow becomes critical.

Communication is also key. If creditors terms are to be extended their expectations need to be managed (and bear in mind that they too may be under pressure). Customers also may be suffering and therefore struggle to pay. Finally staff need to be aware of what the business may require of them.

All this on top of Brexit and other uncertainties!

If you need advice on any of the matters raised above please contact Lucinda Coleman who will be happy to provide support and advice.

FEATURING: Lucinda Coleman
Lucinda is a partner in PKF Francis Clark’s Business Recovery team, she is a Chartered Accountant and a Licensed Insolvency Practitioner with the ICAEW (Institute… read more
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