Covid-19 Finance Planning

As lockdown measures begin to ease, business’ owners need to start planning now for the impact on their cash flow and reserves.

Whilst Government have provided short term fixes for business, the real pain is likely to be felt once lockdown has been lifted and we all return to work. There are six key dates over the next year that need to be considered and planned for very carefully.

1. 21st September 2020

For most businesses, the lockdown itself will not be the worst period for cash flow, instead it will be when things start up and running again. As the new working capital cycle begins, there will be certain commitments, and the reserves you would normally rely on have already been depleted.

If we assume that most businesses are going to get back to some sort of ‘normal’ in June or July, the peak effect of the working capital rebuild is probably going to hit in September. Therefore, the last week of September is a key date that businesses should start planning for now.

2. 1st October 2020 and 1st January 2021

Most companies have December or March year-ends, 1 October this year and 1 January next year are key dates as they are when Corporation Tax payments are due.   The crisis hadn’t kicked in back in December and was only just taking hold in March, so profits were probably higher at year end than now and the tax bill will be higher accordingly.

The lockdown may have depleted the cash generated in your last financial year meaning it is no longer there to pay the tax due. For December year-ends, who have just gone through the September working capital peak, cash could be particularly tight when Corporation Tax falls due.

3. 7th November 2020

For businesses with a March/June/September/December VAT stagger, 7th November is the due date for the VAT on the September quarter. The September quarter is likely to be the first quarter with a significant liability from returning to normal trading.

Bearing in mind that this payment is going to be following hot on the heels of the September working capital peak and potentially the October Corporation Tax payment, the VAT payment will need to be planned for.”

Whilst it may be possible to spread the payment with a Time To Pay arrangement with HMRC, or short-term borrowing, these tactics are potentially dangerous to enter into.

The VAT man is one not to get on the wrong side of and if there is one thing that will push businesses into insolvency more than any other, it’s getting behind on their VAT.

4. 31st January 2021

The end of January is the payment date for income tax. While this is a personal liability, not a company one, for many owner-managers, all income comes from the business, so there is usually a knock-on effect.

Since the government made it possible to defer the 31 July 2020 payment on account, the amount that will be due on 31 January 2021 will potentially be that much higher.

We should all set our 31 July 2020 payment to one side so we have it ready, but if you have reduced your drawings to protect the company, that may not have been possible, so you may need to draw money from the company to pay the tax due, causing more issues with cash flow.

Whilst you could potentially agree a Time To Pay arrangement with HMRC, you are only spreading the debt and causing more stress to on-going cash flow.

The January 2021 payment will be based on your income to 5 April 2020, which was again pre-crisis and may well be higher than your current income for the tax year 5 April 2021.

It may, therefore, be possible to reduce the payment on account that needs to be made on 31 January alongside the 2019/20 final payment.

Get your tax return done as soon as possible so that you know what the amount is. Remember any Grants received from Government are taxable as income, so allow for that in your calculations.

5. 31st March 2021

One of the first things the Chancellor announced was that VAT that was due during lockdown did not need to be paid until the 31st March 2021, so this is a significant date. Given the various stress on businesses’ cash flow that have already had a significant impact, this has the potential to be one of the most critical dates of the COVID-19 crisis.

It is essential to confront the realities of the situation now and as it’s more than nine months away, you have time to plan, put money aside or arrange facilities to fund it.   The worst thing you can do, as a business owner, is to put your head in the sand and ignore this potential issue that’s coming towards you.

Other dates to keep in mind are rent quarter days; traditionally in the UK, quarterly rent is payable in March, June, September and December.

If your business pays rent quarterly, then three of these quarter days closely coincide with the key dates we have identified at the end of September 2020, December 2020 and March 2021.

6. 1st May 2021

The final date to be aware of is the year anniversary of the CBILS (Coronavirus Business Interruption Loan Scheme) and BBLS (Bounce Back Loan Scheme). These started to be advanced in April and May 2020, mostly with twelve-month repayment holidays, so most repayments will start around 1st May 2021.

The CBILS loans are assessed for affordability, often assuming a return to 2019 trading levels by the time the loan payments commence while the BBLS loans were issued with no checks on affordability at all!

Due to the significant impact on the economy, it’s quite likely that 2019 sales levels will not return as quickly as hoped and that, combined with the aforementioned pressure on cash flow, many businesses could find themselves unable to repay their loan which could result in a second wave of business failures over the course of summer.

Those businesses that are prepared to confront the brutal facts of their current reality will be the ones that prevail in the long term.

The dates above are key; start thinking about how you might navigate through a series of ‘pinch points’ from a cash flow perspective and lay your plans now.

If at all possible, take advantage of the CBILS or BBLS loans now to cover your cashflow later, rather than deferring VAT and Tax payments and having to apply for loans when the business is in distress, which are unlikely to be granted at that point.

By planning now you will have longer to pay the debt back and more certainty in your financial planning, allowing you to concentrate on rebuilding the business and that vital cash flow.

The key to business resilience will be to address these challenges head-on and it all starts with planning now.

There is a Zoom meeting on Tuesday 26th May @ 11am where we can address any concerns or ideas that you have concerning the above – That invite has and will further be sent under separate cover.