What does your business look like post Covid?

As lockdown restrictions ease and companies start to see an increase in business; now is the time to plan what the next few months and even years start to look like. Decisions made in the next few months could have far reaching consequences.

The Coronavirus Business Interruption Loan Scheme (CBILS) and the Bounce Back Loan (BBL) have been essential in many cases to keep companies trading. They have enabled payment of bills and suppliers that were still needing to be paid and could not be deferred.  Care is needed here however, as although a source of relief they are only a loan. Therefore they should not be confused with furlough payments and grants, which do not need repaying.  Some companies have seen an immediate uptick in business, but what if yours hasn’t? You need to be planning to pay these loans down potentially early next year; but how do you know if you can afford it?

The other thing that companies need to be aware of, is that many of these loans have effectively been used to fund losses over recent months.  The loans do not go through the company P and L as income.  Their cashflows might look OK for the time being, but the profit and loss accounts are not going to look great.  Why is this a concern, as it seems to contradict the old adage of “cash is king”?

The issue we see is three fold:

• Many clients pay themselves via a modest salary and top these up via dividends. Dividends can only be paid out of distributable profits. If losses have been incurred, are there going to be any profits to distribute?  Taking dividends when the profits are not there leads to tricky tax issues to navigate through and can in fact lead to extra costs to the business in the short term.
• Many suppliers and indeed customers rely on clients who have strong balance sheets to do business with. Some use credit checking agencies to check the ongoing viability of a company to complete its obligations.  Company financial ratios such as the “Acid Test” and “Gearing Ratio” might sound foreign to a number of business owners; but a poor balance sheet could lead to issues with securing trade credit with suppliers.  There are many possible solutions to this problem and companies should be considering what they can do now to preserve trade credit limits in the future.
• As businesses start to hunt for new work, care is needed to ensure that the work is still profitable; to ensure that work is not quoted for at a loss just to keep people “busy”. There will be excess capacity in the economy and you need to ensure that you can still make profit on jobs / services otherwise we could see prices being reduced significantly, which is likely to lead to a race to the bottom.

Here at WCL we are expertly placed to assist in any of the above issues and would highly recommend planning for the future and your year end now.