With his experience as a Finance Director across a range of sectors, Geoff Maclauchlan of Kingsmere Finance Directors, provides strategic financial and operational planning and management guidance to businesses aiming to increase their financial stability, efficiency and profitability.
As the North East is impacted by a second wave of coronavirus restrictions, Geoff spoke to Northern Insight on what business owners and managers should be thinking about now, and reflected on changes which have taken place since his previous article.
The good news
There have been improvements to the situation. Deferred VAT, due to be paid by next March, can now be spread over 11 months. The repayment terms for Bounceback and CBILS loans will become more favourable, with the option to extend from six to ten years – a lifeline for many businesses. The loans remain open for applications until 30th November, the banks having until 31st December for approval.
The Job Retention Scheme (Furlough) finished at the end of October to be replaced by the Job Support Scheme – this is less generous than the former and will probably be of limited use. Very recently, the Chancellor announced an extension to this scheme which will provide greater support to those businesses under government instruction to close. Importantly, the bonus payable to businesses which kept employees on throughout the furlough scheme becomes payable in January – employers should check their entitlement.
The not so good news
Several changes are likely to work against business interests. Temporary suspension of the restrictions relating to wrongful trading have been cancelled, so directors must not allow their business to trade insolvently, or they risk personal responsibility for liabilities incurred after that point. They should look for warning signs – declining orders, costs and margins pressure, difficulties finding money to pay creditors – and ensure they get advice from a professional, because in these circumstances, the director must put interests of creditors ahead of shareholders.
Particularly worrying is the re-introduction of Crown preference from 1st December, meaning that HMRC leapfrogs the priority of repayment to creditors of an insolvent business. Before this, banks with floating charges had first claim on everything behind a fixed charge and certain preferential creditors. Inevitably banks will look closely at these situations, as they will rank behind HMRC in the queue, with in many cases large amounts of VAT, PAYE etc being owed. Overdrawn businesses may be required to grant fixed charges, give personal guarantees, or worse, have their facilities withdrawn. They must assess the implications of this change on their own business.
They should also determine whether they are in breach of banking covenants. For example, companies benefitting from the three-month extension of time to file their accounts at Companies House could be contravening the terms of their banking agreements. Other technical and performance breaches may occur, all putting a business in a weaker position when dealing with their bank. It is important to obtain expert advice at an early stage on the implications of any breach.
Returning to HMRC, expect a change from the supportive approach which has helped companies since March. They have been clear about their intention to come down heavily on businesses which have over-claimed on the furlough scheme. The amnesty date for corrections has passed so any overclaims should be reported quickly, at least helping to mitigate the size of the penalty.
Cynically one might think that the government will deal with the impending unemployment crisis by recruiting an army of investigators to check on fraudulent Bounceback and CBILS claims, or misuse of the funds even if properly legally claimed. It goes without saying that beneficiaries of these schemes should adhere to the rules.
Uncertainty
The main problem facing businesses currently is uncertainty, particularly in leisure, hospitality and tourism. They do not know how long the pandemic will continue to wreak havoc or if they ca
survive. Strategically, a “plan for the worst, hope for the best” approach should be adopted, focusing on the core priorities of cashflow, forecasting and communication.
And still! – the forgotten word – Brexit! The outcome of negotiations is still unclear, but inevitably many businesses will have new problems to address, with very little time to do so.
Business Priorities
An extensive cashflow forecast remains vital – it needs to cover at least a 52-week period, ideally 18 months. A further priority is to have a business forecast based on the most realistic assumptions available at that point in time. A sensible approach is to have both worst- and best-case scenarios, thereby flagging any future potential issues. Communication remains crucial – keep talking to employees, professional advisors, banks, landlords, insurers – to anyone with a direct involvement with the operation. The business community is still in a phase of mutual support and businesses should take advantage of the help and advice that is available.
Finally, if it ultimately becomes clear that the business faces insurmountable challenges, businesses should speak to an insolvency practitioner. Their experience and expertise may provide a range of solutions and options that have not previously been considered.
For further details visit www.kfdl.co.uk or contact Geoff at gm@kfdl.co.uk
