Member Article

Low reserves will create a new year debt crisis for businesses

MANY businesses are now operating on just a three month reserve as the problems caused by the Covid-19 pandemic continue to impact the commercial world.

And businesses that try to ensure a brighter future by over trading could simply be adding to their problems, says one Sheffield expert.

Latest figures from the Office of National Statistics show that 36 per cent of businesses who have not permanently stopped trading have cash reserves of three months or less available to continue trading.

“Businesses that have been hit particularly hard by the pandemic may well have dipped into their reserve funds in a bid to keep afloat,” said Ryan Holdsworth, of Sheffield business turnaround and insolvency practice Graywoods.

“Other businesses who may have taken advantage of Government support such as bounce back loans are seeing these must be repaid and this is another burden on their already delicate cash flow position.

“Just as important, there are signs of much more activity from HMRC, who may have taken a more lenient approach at the height of lockdown but are now looking to recover any taxes that are outstanding.

“And don’t forget that anybody who took advantage of one of the grants being offered during lockdown will also be having to pay tax on that sum, just one more burden that might not have seemed important at the time.”

Ryan warned, however, that possibly the most dangerous route to recovery was over trading.

“It’s easy to see that a return to full pre-Covid capacity might seem like the way to boost business but it isn’t a quick fix and can lead to even greater problems,” he said.

“Supply chains are still weak and the belief that taking on too many orders will help you through a cash crisis is not viable.

“It’s just as likely to result in angry customers at one end as you face a backlog of orders that is beyond your control and demands for payments from creditors at the other end.

“No matter how full the order book is, if you cannot pay your bills and meet your commitments you are adding to the crisis, not relieving it.

“HMRC are starting to send their agents out to collect the money they are owed and early next year you will likely start to see an increase in the number of insolvencies and businesses facing very challenging times.”

This was posted in Bdaily's Members' News section by John Highfield .