DON’T PLAY OSTRICH WITH YOUR CASH & SOLVENCY

In these difficult times all Execs of SME’s will be looking at their bank balances and wondering how long the cash will last.

Now is definitely not the time to stick your head in the sand and hope that all will be well when you lift it out.

Thankfully there have been many Government and bank schemes to assist in keeping the lights on, but once these have been exhausted, the business is on its own. The limited remaining resources will need to be stretched as far as possible with the hope that this will last until business gets back to normal, whatever “normal” may look like.

However, there could be a tsunami of cash drains on the horizon which need to be factored in.

1. Repayment of any short-term bank loan or overdraft with interest

2. Any delayed VAT and Tax payments. Even though HMRC may have been lenient during this time, they aren’t a charity and will not be writing off the liabilities, so this Tax will still need to be paid.

3. Any Bounce Back Loans (BBL)- repayments will start on month 13 after receipt of original loan

4. Any CBILs- repayments also start on month 13 but repayment terms and interest could be more onerous than a BBL

5. Furloughed staff that you would like to keep onboard will need to go back onto the payroll with all the added costs of NI, pension, health care etc

6. Furloughed staff that you cannot hold onto will have to be made redundant, which will incur the costs of redundancy

The crunch period will begin next March, when any delayed VAT has to be paid, along with first repayment plus interest of any BBLS or CBILS, if you were quick out of the blocks in applying for them. As a business owner and/or Director it’s very important that you put together an updated business plan that factors in the change in trading conditions and extraordinary cash requirements.

If you are a Director always bear in mind a Director’s fiduciary responsibility to ensure that the company is not trading whilst insolvent and has sufficient working capital for the foreseeable future. It should be noted that it makes no difference whether you are an Executive or Non-Executive Director of the company.

Trading whilst insolvent is defined as the company continuing to trade beyond the point at which its insolvency became inevitable and unavoidable. This point could be sooner than you think as you need to take into account any costs and liabilities that you would incur should you decide to cease trading. These will be set off against any net inflows from selling assets. Examples of costs would be employee’s severance pay or notice periods for property leases.

However, for the 3 months from 1 March 2020, the Government suspended the rules around Director’s personal liability if it’s found that the company was “wrongfully trading”. This means that from June the wrongful trading legislation is applicable, so best to review your cash requirements as soon as possible.

An easy solution for this is to use a cash flow model that clearly shows the cash in/out and in which months over the next year you will experience crunch points.

Although the challenges of this current crisis are not over, it is time to take your head out of the sand, prepare for the realities your business will face so that you can start to rebuild within the new normal.

If you would like to chat about any of this in further detail or if you are concerned about your business, please drop me a message and I will happily reach out.