Advice: financial planning for after the lockdown and making sense of insolvency laws

31 March 2020 by
Advice: financial planning for after the lockdown and making sense of insolvency laws

The government is clearly helping to encourage operators' grit and determination to get through this, and it is pleasing to see so many business owners thinking outside the box and looking for every which way to survive until the lockdown is over. The government help takes the form of:

• the Job Retention Scheme;

• grants for businesses, now being administered by local authorities;

• business rates holidays for some;

• the coronavirus business interruption loan scheme; and

• the prohibition on landlords from evicting commercial tenants for non-payment of rent in the current quarter.

The government has also announced new insolvency and restructuring measures, to be introduced when the House of Commons opens again at the end of April.

These should provide businesses with the breathing space in order to come up with rescue plans and discuss these with creditors and banks without fear of them making knee-jerk reactions and taking aggressive action. The court would also prevent such action.

The government is relaxing the wrongful trading laws, which could be another worry for hard-pressed directors. This change would mean that directors could not be pursued personally for incurring further debts (such as accruing rent or business rates) while their business is mothballed for the duration of the lockdown.

A number of commentators have said that sound and healthy businesses should not fail during this period. There are signs that some companies with weak business models before the crisis are having to throw in the towel, but the government is clearly taking extraordinary measures to help businesses to survive.

It is really difficult to know what the future holds. We all have to look into our crystal balls to try and understand what the business landscape will look like when the lockdown is finished. Will everyone celebrate in our restaurants and hotels? How quickly will the events that have been cancelled be rescheduled and booked? How much disposable income will the UK population have?

Being an accountant, I know the value of financial projections. It is not everyone's strength or cup of tea, but they really do help to show what your business might look like after the lockdown.

Most businesses will come out of this with more debt than they went in, and that debt has to be paid back out of future profits. The debt also has to be paid back before owners can take dividends, and so it really makes sense to look at financial projections for the next 12 to 24 months and see what the lockdown means in financial terms.

Many businesses are talking to their banks about increasing their borrowing, and some of those discussions will eventually involve the scheme to provide government-backed business interruption loans.

The government grant to refund furloughed wages is incredibly generous. However, employers also need to be aware of factors such as the accrued holiday furloughed employees will accumulate. This will represent a further liability for businesses and which needs to be funded over the course of the next two years.

There are some financial modelling tools or spreadsheets which are available online and accountants also have modelling tools which they can help with. It is really important that the financial modelling tool used is "integrated", meaning that the cashflow projection should be linked to a profit and loss projection and the balance sheet projection. This allows the business to see:

• what working capital and borrowing requirement it has for the next trading period;

• what profit can be earned now and in the future, and what loss may be suffered during the period of the lockdown; and

• what debt is going to sit on the balance sheet and will need to be repaid.

It is so important to understand these three elements for business planning purposes. No business owner wishes to take on so much debt that they will have to work for the next two to three years simply to pay off debt arising from the crisis.

I really hope that our hospitality businesses can spring back to life as soon as the lockdown is over and that business owners will prosper. Financial modelling is one of the key ways to make sure you have a healthy business for the future.

Andrew Tate is a partner and head of restructuring at accountant Kreston Reeves

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