Unsure what the next problems will be, or how their companies will survive them, directors are taking risks that perhaps they should not be taking.
Many directors feel as though they are in a commercial battlefield. They are being battered from all sides and can only see the position generally worsening as austerity measures implemented by the Government start to bite. We examine some of the issues that companies will have to contend with now and in the near future.
Unusual economic conditions
HMRC
HMRC statistics show that up to December 2010 395,400 time to pay (TTP) arrangements had been granted involving tax totalling £6.83bn. This exceptional amount of support from the Government over the last two years has helped companies survive. However, times are changing and we are seeing evidence of HMRC hardening their stance to companies renegotiating TTP plans and the leniency shown previously is starting to disappear.
Interest rates
Interest rates have been at an all time low of 0.5% for two years. Losses that some companies would be making had they still been at pre-recession levels are therefore being masked. The majority of economists believe that interest rates will rise this year and by the middle of next year be somewhere near 2% in order to curb inflationary pressures. This increase will cause companies that cannot afford the repayments to either further cut costs (which have already been dramatically slashed) or face defaulting on their loans.
Banks' position
Banks have had no option but to be supportive of businesses during the recession because their security, primarily on property, was dramatically affected when the property market collapsed at the beginning of 2008. Many banks are allowing businesses to pay only the interest they owe and freezing capital repayments to help companies survive. As interest rates increase this may become impossible for many companies and it will then be down to the banks to decide whether to change strategy and perhaps consider enforcement.
Challenges for directors
UK corporates are clearly going through a challenging period. Many companies are just about surviving day-to-day, with their balance sheets exhausted and all means of finance having been utilised. Many have survived one of the longest and deepest recessions in living memory by implementing stringent controls on costs, making redundancies and holding back on capital investment. These companies cannot reduce their cost base further and are unlikely to be able to deal with the pressures coming, especially if they all come at the same time.
Directors need to be very careful that, as these pressures start to mount, they avoid trading while insolvent and they take advice at an early stage if they become aware that any of these discussed (or other) issues will adversely affect their businesses. Early discussions with banks, HMRC and other major stakeholders are vital to the survival of a company that is experiencing financial difficulty.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.