Can the exit from lockdown avoid a tipping point with redundancies?

Early signs suggest that businesses are really benefitting from an ease in lockdown restrictions. But is it enough to avoid a tipping point that will result in mass redundancies?

We are two weeks on from the official reopening of non-essential retail, gyms, hairdressers and the outside areas of pubs and restaurants. There are early indications that the UK economy is enjoying a sharp uptick, according to analysts at Barclay’s.

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But the Federation of Small Businesses (FSB), despite recording its highest level of business confidence since Autumn 2014, have warned that one in seven small firms are expecting to make redundancies between April and June. Future redundancies could coincide with the winding down of the CJRS scheme which ends in September.

There are a few factors which businesses need to take into account:

  • Collective and individual redundancy consultation still needs to be carried out during the pandemic, but can be done remotely.
  • Under new legislation introduced last July, furloughed employees are now entitled to receive statutory redundancy pay based on their normal wages rather than the reduced 80% furlough rate.
  • From 1 December 2020, employers are liable to cover 100% of wages of employees working their notice period and can no longer claim using the CJRS scheme. This means that if an employee is on furlough, their furlough period ends the day before the start of their notice period. Employers cannot use furlough payments to cover redundancy costs.

Accountants will need to be on hand to support clients going through redundancies, not just from a transactional, cash management perspective but from an emotional one, too.

We spoke to accountants to gain insight into how their clients are faring and how they intend to support them during periods of redundancy.

Some redundancies are inevitable because of limited cash reserves

Simon Young, founder Aysgarth Chartered Accountants
Some of our clients are having to make redundancies. Recruitment businesses and personal services, such as beauty therapists and so on are struggling. Other sectors have grown and taken on more staff.

The clients that are making people redundant are reviewing their costs. They know their income has collapsed, they know what reserves they have and they have to make a forecast of what is likely to happen in the future. These calculations do not have to be complicated, they can be pretty simple.

Next steps: We are being a listening ear, engaging clients in a conversation and celebrating with those clients who have seen business continue as normal as well as assisting with previously successful businesses which through no fault of their own, have been destroyed.

Verdict: Clients are making redundancies because they’ve reviewed costs and financial forecasting predictions and had to make difficult decisions.

Redundancies are usually the last resort. Most businesses are adopting a ‘wait and see’ approach

Jessica Garbett, director, Whitefield Tax
Generally, making redundancies is the last resort for businesses, but it is something which businesses are having to consider amongst other options. However, it’s too soon to gauge the actual Covid fallout.

Most businesses are developing different financial and operational scenarios for the coming months and years, and then adopting a wait and see strategy.

Planning is the key, allied to watching short term cash flow and performance.

Next steps: Be a sounding board. It’s not a practising accountants’ role to be directive, but to be a trusted and responsive sounding board with a touch of mentoring.

Verdict: Most businesses are adopting a ‘wait and see’ approach.

Accountants are ‘key’ in helping businesses make financially-based decisions

Andy Carey, partner, McBrides Chartered Accountants
All clients will be looking to see how their business emerges from the latest (and hopefully last) lockdown. It’s no secret the retail and hospitality sectors have been dealt a substantial blow. However, most businesses have had at least a year with little or no income and may now emerge with a considerable amount of debt. Redundancies are therefore likely to follow as part of a cost-cutting exercise for some.

Business owners take their responsibility as an employer very seriously and any redundancy decisions will not be taken lightly.

Accountants should be suggesting and prompting in certain areas to assist the management in running the business.  They’ve been key in helping business making important decisions based upon ever-changing financial results.

As well as offering tailored support, we’ve been providing weekly webinars and factsheets to provide clients with practical ways to navigate through the crisis. These have included:

  • Discussing latest government measures and how they impact businesses.
  • Updating business owners on available loans and grants.
  • Creating a business support community.

Next steps: Budgets and cashflow forecasting is a must as many businesses will now be saddled with a proportion of debt. Owners will need to have a clear plan of how the business should emerge from lockdown and address any shortfalls or challenges.

Verdict: Accountants have been ‘key’ in supporting businesses with important decisions.

Redundancies may happen over the next six months and beyond, so future planning is crucial

Paul Reed, owner, Reed & Co
None of our clients have had to make redundancies and instead, have put staff on furlough to prevent this happening. However, depending on the bounce back, redundancies may be inevitable over the next six months.

A lot of our clients have taken advantage of the bounce-back loan scheme which has helped with cash flow during a difficult time.

Next steps: We are advising our clients to remain calm and make rational decisions when it comes to finances. Plan far out into the future as possible, even if it feels extremely difficult during the current climate.

Verdict: Redundancies may happen over the next six months depending on the economy, so it’s important to create long-term financial forecasts to help with future business strategy.

Cause for optimism overall, but debt-laden companies will have to make redundancies

Matt Portt, founder, Portt & Co

A high proportion of our clients have been backed by venture capital funds, so they are well capitalised and focused on sustained long-term growth, which means they are able to absorb short-term shocks such as Covid.

In my opinion, we are seeing pent-up demand being released and business confidence returning. We are also seeing businesses authorising expenditure decisions that had previously been on pause due to Covid.

But whilst there are reasons for optimism in many cases, there are also a large number of ‘zombie companies’ which have survived Covid by taking on large debt. Often these businesses had very low profitability pre-pandemic and the lack of capital means they are unable to invest and diversify. Sadly, when the time comes to pay back the debt, many will be unable to do so, leading to insolvency and job losses.

Next steps: We’re encouraging fast-growth companies to bring forward recruitment drives while there is a greater availability of people who have either been made redundant or treated poorly by their current employer.

Verdict: There’s cause for optimism in many cases, but zombie companies unable to pay off Covid-related debt will have to make job losses.

Annie Makoff is a freelance journalist and editor.

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