Financial advice for farmers: It’s time for businesses to go into survival mode

Financial advice for farmers: It’s time for businesses to go into survival mode

One of the fundamental mistakes of the financial crash of 2008/2009 was that too many businesses crashed, leaving long unemployment queues.

Worse still, it took years and years for businesses to become strong enough to take on that available workforce.

Following that crash, the unemployment rate topped out at over 15% and remained in double digits for several years.

The most important issue for businesses in the short term is liquidity.

Simply put, that means having enough money to pay bills as they fall due.

The first step is to evaluate what the current liquidity of the business is, by preparing a simple cash-flow budget.

How much savings are in the business bank account, or how much funds (if any!) are in the current account?

What income is due to be lodged in the coming month, and what outgoings are due to be paid?

In terms of income, place less reliance on the amount of income arising from day to day sales.

At the time of writing, businesses are still open, but as a back-up, prepare a variety of plans, including reduced trading, and a cash-flow plan for the worst case scenario where trading is suspended.

To protect liquidity, or funds available to meet expenses, the following strategies can be considered in terms of increasing cash-flow into the company:

  • Contact all debtors of the business, most especially those beyond their existing credit terms, and demand payment.
  • If payment is not forthcoming, request post-dated cheques, or standing orders, in order to keep funds coming into your business.
  • Rigidly follow up on this, remember, it’s your money that they are holding on to!

  • Tighten down credit terms for all customers.
  • If you typically give 30 days of credit, ask those customers who you trust if they will give you a payment on account, in return for a cash discount.

  • Reduce the amount of credit limits, particularly where certain customers are slow payers, insist on payments on account before allowing more purchases on credit.
  • Incentivise bulk sales, in order to reduce the volume of stock you are carrying.
  • Holding large volumes of stock means a lot of cash-flow tied up in goods.

  • Liquidity can be boosted in the short term by drawing down loans or availing of overdraft facilities.
  • This is perhaps the most dangerous strategy, as without very sharp management, the company might end up building up credit while trading at a loss, meaning an illiquid situation is turned into an insolvent situation.

  • Inject personal resources into the business, that is, transferring savings into the business to shore up finances.
  • From a financial perspective, this can again mask a situation where the business is losing money, resulting in both personal and financial loss if left unchecked.

    In terms of minimising your cash-flow outgoings, consider strategies to protect what cash-flow you have.

    Some practical examples could include:

  • Defer all discretionary expenditure; discretionary means optional expenditure which the business does not have to make.
  • Hold off on capital expenditure investments.
  • Reduce stock order volumes, in order to reduce the amount of funds tied up in stock.
  • Consider temporary lay-offs, or placing staff on a short-working-week, for a number of weeks, where business has gone quiet and staff are effectively idle.
  • For loan commitments, seek to restructure repayments by going interest only for a period of time.
  • The Revenue have confirmed that businesses will not be charged interest on the late payment of VAT or PAYE due for payment in the month of March.
  • However, it is advisable where possible to avoid running up tax liabilities with Revenue, as Revenue seldom engages in debt forgiveness, and has the strongest powers to recover unpaid taxes.

  • Avoid making deposit payments for goods not yet received.
  • If your suppliers are demanding payment upfront, consider using escrow facilities provided by a trusted solicitor, where funds are held on account protecting both the customer and the supplier.

  • String out payments, where facilities are available to do so.
  • For instance, many insurance companies offer to collect premiums over 11 months, rather than one payment.

    Bear in mind the additional cost of taking this option, and weigh up whether it is worthwhile.

  • Avoid running up trade credit without pre-approval, it is unfair to your suppliers, and can cause financial contagion, where one customer going bust leaves a supplier in financial difficulty.
  • Keeping business alive during this time of crisis is of utmost importance to the business owner, in terms of them being able to earn a living and meet repayments, service trade credit, and most importantly, maintain the capacity to re-employ people quite quickly once normal trading resumes.

    It is unfortunate that many employees will be temporarily laid-off, or put on short working weeks, over the short term.

    But, in the grand scheme of things, it is better that businesses survive this dip.

    Business owners should also act with due care for other business owners, their suppliers and customers.

    All too often, we hear of customers being stung, where deposits are lost, or where suppliers are left out of pocket, having not been paid for stock.

    The key message here is for business owners to act in a financially responsible manner for everyone’s sake.

    In the medium term, business will resume, and life will return to normality.

    In the interim, prepare to weather the storm.

    Chartered tax adviser Kieran Coughlan, Belgooly, Cork

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