The cash flow cliff edge is coming – is your business ready?

The cash flow cliff edge is coming – is your business ready?

October 8, 2020

Financial help for businesses

The Coronavirus crisis has created the most difficult financial climate in living memory, maybe for best part of a century. Equally, never has there been so much help and support for entrepreneurs battling to keep their businesses afloat. The government has laid a protective cloak of loans, payment deferrals and legislation over our commercial Pandemic puddle, like some latter day Sir Walter Raleigh.

There is a business rates holiday for some, VAT liabilities have been deferred, HMRC will agree payment plans for PAYE with almost no hassle, landlords have no effective means of enforcing the payment of rent, creditors cannot use winding up petitions to collect unpaid bills and the Treasury has spent billions on subsidising staff costs.

On top of all this, soft loans guaranteed by the government have been available from banks with virtually no questions asked; a plethora of grants from central and local government can be obtained. Even the threat of wrongful trading was lifted until last month.

Trading has been tragic for many and extremely challenging for others, but with judicious use of all these measures, cash flow has been under less pressure than seemed inevitable when Covid first started changing our lives last March.

What happens when financial help is removed?

Sadly, all helpful things come to an end and the next few months will see the gradual removal of all these support mechanisms, unless the government is forced to extend some of them as the second wave surges.

From the beginning of November, the hugely successful jobs furlough scheme ends and is replaced by the new Winter Economic Plan, a measure which has had to be hurriedly revised within a month of its announcement but which is still less generous in many instances than its predecessor. The hopes that it would encourage employers to reverse redundancy decisions have been dashed, which confirms the reality that businesses cannot go on supporting unviable jobs no matter how small the cost to them.

At the end of December, landlord enforcement ban measures will lapse, as will the prohibition against the use of statutory demands and winding up petitions by other creditors.

For the self-employed and unincorporated businesses, the end of January 2021 brings a nightmare of tax liabilities. The deferred July 2020 self-assessment instalment is due then, as is the normal January 2021 payment. These liabilities will be based on profits earned in the better times before Covid, but they will have to be met out of current earnings slashed by the Pandemic.

The first week of February sees the payment date for Christmas quarter VAT, probably lower than in many previous years because of subdued trading in some sectors, but an unwelcome burden none the less.

Then at the end of March, businesses will have the current quarter’s rent to pay, as well as any catch up commitments they have for any rent they had chosen not to pay while their landlords were unable to enforce.  As we move into April, business rates become payable again and will have increased significantly from the level paid back in 2019/20. Finally, initial interest and repayment holidays on all those Bounce Back Loans and other schemes will begin to end during 2021, bringing increased outgoings for the borrowers.

Cash flow challenges for business

What all of this adds up to is a considerable cash flow shock for many businesses, as the impact of the second wave continues and as they are forced out of their current Coronavirus safe harbours. It means that directors need to take a cold, hard look at their company’s finances and make sure that they can make it through the storm into safer waters. Blue sky optimism is not the way out of these problems.

If they are in any doubt, they need to taking steps urgently to bolster their financial resources. They also need to be taking expert professional advice now about the way forward, if only to sense check their assumptions and their plans, and to make sure they should carry on trading.

If you have any concerns having read this article, please do not hesitate to contact one of our Partners, confidential no obligation chat.