Managing Cash-flow Throughout The COVID-19 Pandemic

Introduction

The Coronavirus outbreak and related government measures are placing significant pressure on companies’ cashflows. This guide looks at both the government measures that have been initiated over the past few weeks, as well as alternative measures to consider when deciding how best to manage your finances.

UK Government Measures

Coronavirus Job Retention Scheme

It is believed that all UK businesses with a PAYE scheme in place are eligible to apply for financial support that covers a portion of the salaries of employees that would otherwise have been laid off as a result of the Coronavirus pandemic.

Employees that fall within this category may be re-designated as “furloughed workers”, meaning workers that are still on the payroll, despite not being able to carry out their employment duties. Guidance to date indicates that HMRC will reimburse 80% of furloughed workers up to a maximum of £2,500 per month, per worker (although whether this amount is gross or net has not yet been confirmed).

Employees must be notified of their change in status and, depending on the individuals’ employment contract, any such change may be subject to negotiation (e.g. an employee may be entitled to elect for redundancy rather than to be furloughed and receive a reduced salary).

How to apply

Information regarding furloughed employees, including details of their earnings, will need to be submitted to HMRC via a new online portal. HMRC will then reimburse employers (subject to the specified caps). The portal has not yet been made available, but further details will be provided in due course.

Coronavirus Business Interruption Loan Scheme

The British Business Bank is now supporting start-ups and SMEs that are looking to access loans, overdrafts, invoice finance and asset finance (of up to £5m) in order to maintain safe cash flow levels during the COVID-19 pandemic. This will enable businesses, with a UK base and with turnover of no more than £41 million per annum to borrow with the first twelve months of finance interest free.

How to apply

UK Businesses with a turnover of no more than £45 million can apply for the job retention scheme. More than 40 accredited lenders are currently participating in the scheme and businesses have been encouraged to contact their usual lender / banking partner in the first instance.

Further details on how to apply for the scheme and for other information can be found on the British Business Bank website: https://www.british-business-bank.co.uk/ourpartners/supporting-business-loans-enterprise-finance-guarantee.

Corporate Financing Facility (CFF)

The Bank of England has established a Corporate Financing Facility Fund (CFF) which will purchase ‘commercial paper’ to help support larger firms with cashflow issues. ‘Commercial paper’ is an unsecured, short-term debt instrument issued by a company. The CFF will offer financing on terms comparable to prevailing markets (benchmarking against the period prior to the COVID-19 economic shock and taking into account borrower credit ratings) and to firms which can demonstrate they were in sound financial health prior to the COVID-19 outbreak.

How to apply

Eligible businesses should contact their bank in the first instance. Further details and a list of banks willing to assist can be found here: https://www.bankofengland.co.uk/markets/market-notices/2020/ccff-market-notice-march-2020.

Statutory Sick Pay Relief Package

Small and medium-sized businesses (with fewer than 250 employees) can reclaim up to 2 weeks’ of statutory sick pay for employee sickness absences related to COVID-19. From 13 March 2020, where employees need(ed), or wish(ed), to self-isolate, their employers will be reimbursed by the government in respect of payments of statutory sick pay made from the first day that such employees commenced self-isolation and consequently became unable to work (up to a maximum of 2 weeks’ statutory sick pay).

How to apply: the government is currently working on the procedure for reimbursing employers, with further details to follow in due course.

Business rates holiday (restricted sectors)

Businesses operating in the retail, hospitality and leisure industries in England will be exempt from business rates for at least 12 months and this will apply to the tax year 2020 to 2021 tax year. Eligible businesses include shops, restaurants, cafes, drinking establishments, cinemas, live music venues, leisure facilities, hotels, guest and boarding premises and self-catering accommodation. If your business received the retail discount in the 2019 to 2020 tax year, you will be rebilled by your local authority as soon as possible.

How to apply: no action is required. Applicable changes will automatically be applied to your next council tax bill in April 2020.

Grant funding

The government has also made available grants of up to £25,000 for retail, hospitality and leisure businesses that are responsible for paying business rates in respect of properties with rateable values between £15,000 and £51,000. The government will also offer grants of up to £10,000 for all business that qualify for small business rate relief or rural rate relief. Businesses that don’t pay business rates are not included in this scheme.

How to apply: no further action is required. Local councils will contact applicable businesses directly. If you still wish to contact your local council, you can find helpful details here: https://www.gov.uk/find-local-council.

HMRC Time To Pay (TTP) Scheme

HMRC is affording businesses and self-employed individuals additional time in which to pay their taxes, if they are in financial distress as a result of COVID-19. These payment deadline extensions – currently being referred to as “Time to Pay Arrangements” – will be dealt with on a case by case basis, with the outcomes depending on the circumstances.

HMRC can currently agree to defer PAYE and NIC payments without charging penalties in respect of such late payments. However, the official line from HMRC is still that the usual 3.25% interest charge will accumulate on any late payments.

How to apply: for more information, please call the HMRC Coronavirus Helpline: 0800 015 9559 (open Monday to Friday 8am to 8pm, and Saturday, 8am to 4pm).

Non-Government Measures

Reducing Overheads

In addition to the government support provided (e.g. through the Coronavirus Job Retention Scheme), businesses should constantly assess at whether they can save cash by reducing overheads more generally.

The largest overhead typically facing most SMEs is wages. In this regard, it might be worth exploring whether workers would be willing to take temporary pay cuts and/or working reduced hours during the crisis, in the knowledge that this could provide greater job security in the long run (by helping to ensure the employer remains solvent).

Employees who are worried about their own financial position should be encouraged to look at the support measures that are being put in place for individuals, including mortgage payment holidays and (limited) protection from eviction for renters.

Businesses should also monitor their other regular expenses and consider whether there are ways to reduce these or to defer payment deadlines. For example, it may be that monthly spend on Google AdWords or other marketing activities could be reduced for a period of time, given that consumers may be less likely to buy certain products or services at this time anyway.

In addition, regular subscriptions or services that are no longer needed (or cannot be fulfilled by the provider) should also potentially be put on hold, for example office cleaning services or fruit/milk delivery services. It may also be worth considering speaking to your landlord to agree a rent-free period, reduced rental rates and/or extended payment deadlines.

The above section should be read in conjunction with the ‘Customer Retention’ section below.

Loans / Creditors

As well as facing potentially large tax liabilities and employee overheads, many SMEs will likely also have existing financing or credit arrangements in place with lenders or suppliers. Meeting these additional liabilities may also become increasingly difficult, especially if existing customers cease making purchases, cancel subscriptions or struggle to pay invoices on time.

The knock on effects of such disruption to cash inflows will inevitably affect the ability of businesses to keep up with their required cash outflows. It is therefore important that management teams constantly assess their cash positions and have in place a strategy for managing cash flow should the situation worsen.

If you are experiencing cash flow issues, the first port of call should be opening a transparent line of communication with the relevant creditors (e.g. suppliers or lenders). At this point in time, they may well be facing their own cash flow shortfalls and having conversations internally to work out how best to proceed. After all, joint consensual measures typically work far more effectively than one party unilaterally acting solely in its own interests.

Customer Retention

Given the global scope of the crisis, cash flow issues are impacting almost all sectors and countries. As the squeeze on cash tightens, the natural instinct for customers is to cease making unnecessary purchases and cancel unnecessary services or subscriptions.

However pre-empting this and offering customers payment holidays or opportunities to temporarily suspend their subscriptions can often result in a far better long-term outcome. It is likely that the Coronavirus outbreak will end at some point, and when this time comes, it will be far easier (and
cheaper!) to try and restart commercial relationships existing customers, then to have to invest in acquiring those customers once again from scratch. To that end, there also evidence to support the notion that once a subscription has been cancelled, it can be far more difficult to persuade a customer to re-subscribe, as they may have since realised that they can ‘cope’ without the service.

Alternative Forms of Payment

Whilst cash is king, there may be some suppliers that are happy to be paid in non-cash consideration. One example would be to pay suppliers in options or equity in lieu of cash. Whilst this may not be satisfactory for all parties, if there is a good chance that the issuer will recover well following the crisis, then suppliers may conclude that the potential upside could outweigh the risks.

This short guide has been prepared for directors and owners of private limited companies for information purposes only, in particular to provide a summary of key government guidance and initiatives provided to support small businesses in light of the COVID-19 pandemic. This guide does not constitute legal advice and should not be relied upon, especially given the fact that government guidance and initiatives are being updated and amended on a daily basis. For specific queries and any further information, please contact Ignition Law for advice relating to your particular circumstances.