During the COVID 19 pandemic many businesses across the world, particularly those in retail and hospitality, were required shut their doors or limit trading due to government-imposed restrictions to combat the spread of the COVID 19 virus. Other businesses, such as airlines and tourism businesses, were decimated by travel restrictions. CBD retail and food businesses also suffered a loss of customers due to work-from-home requirements. Some of these impacts, combined with ongoing changes in consumer behaviours, continue to adversely affect businesses despite the worst of the pandemic having passed.
In these unprecedented and difficult circumstances, one might reasonably have expected that the number of businesses going broke would have increased and increased a lot. However, the opposite is true. Insolvency statistics demonstrate that there was a material decline in insolvencies in most jurisdictions during the worst of the COVID pandemic.
This decline in insolvencies, demonstrated in the chart below, reflects measures taken by governments across the world to support businesses through the COVID 19 pandemic. These measures varied across different jurisdictions but generally included substantial financial subsidies to businesses, cheap loans supported by government guarantees, relaxation of insolvency legislation, deferral of tax payments and legislative protection from debt enforcement by landlords and other creditors. In addition, banks offered temporary forbearance from, or suspension of, loan repayments and restructured debts to reduce payments going forward.
The support provided by governments and banks during the pandemic was followed by a rush of pent-up consumer demand as COVID restrictions eased and, more recently, by further stimulatory government initiatives in spending on infrastructure, carbon reduction and renewable energy programs.
Nevertheless, many businesses came into 2023 with weakened balance sheets due to trading losses during the pandemic and additional liabilities in the form of deferred rent, unpaid tax, overdue creditors, and additional debt obligations. These burdens, coupled with significantly higher interest rates, supply chain disruptions, staff shortages, rapid and substantial input cost increases, and changing consumer behaviours will make 2023 a difficult period for vulnerable businesses, especially small and medium businesses. It is widely expected that 2023 or early 2024 will see most developed countries enter a period of economic recession.
There will be many businesses, not just the zombie companies, that will be unable to continue to trade for too much longer and it is highly likely that there will be a significant increase in business failures and corporate insolvencies in the second half of 2023 or early 2024.
In this context, make sure you understand whether your business is vulnerable by preparing realistic, achievable forecasts (best, worst and likely case), regularly monitoring performance against your forecast and regularly updating the forecasts. If your business is vulnerable or under financial stress act quickly to identify and remedy the issues causing the difficulty.
Also be conscious of the potential for external shocks, including any threats posed to your business by the failure of key suppliers or customers. Identify your vulnerabilities to external shocks and have a plan to respond quickly if any external events threaten your business.
Don’t assume that things will get better without proactive intervention on your part. Check out the ‘Publications’ tab for quick and affordable reading materials (including a free article on preparing your business for a recession) that may assist, or you can request bespoke advice via the ‘Advice’ tab. Don’t delay seeking professional advice and assistance if required.
Steve Lloyd
March 2023
Disclaimer
This article contains information and comments that reflect the opinions and ideas of its author which are general in nature and do not take account of the individual circumstances of any specific individual or entity. Strategies outlined in this article may not be relevant to the circumstances of every reader or every entity and are not guaranteed or warranted to produce or result in any particular outcomes. Relevant laws and regulations vary from jurisdiction to jurisdiction and from time to time. Readers are advised to seek independent legal, financial or other professional advice that is current and tailored to their individual circumstances and geographic location. No warranty is made as to the accuracy and completeness of the information contained in this article. Both the author and Survive in Business Pty Limited specifically disclaim any liability or responsibility for any loss, damage or risk incurred to any party as a direct or indirect consequence of the use, application or reliance upon any of the contents of this article.
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