Wednesday, 22 October 2014 09:49

Zombie businesses 'try to run before they can walk'

 

The zombie apocalypse could be coming sooner than you think, with R3, the Association of Business Recovery Professionals, warning that an even greater number of companies are now showing the hallmarks of being 'zombies'.

It's a term that rose to prominence at the height of the recession, and was used to refer to those firms capable of covering their outgoings, but only just - and which would therefore very quickly fall into insolvency if their interest rates rose, or their cash flow was interrupted.

Now the number of zombie businesses is on the rise again, up to 154,000 from 103,000 in November 2013, and in many cases it seems like the cause of this is actually the improving economic conditions.

Giles Frampton, president of R3, said:

"The first flush of growth generated plenty of cash for businesses but now some are experiencing the side-effects of growth too.

"Over-trading and late payment can easily put businesses with bulging order books in a position where cash flow becomes a major headache.

"Businesses will get into trouble if they're trying to run before they can walk and don't get paid quickly enough for the work they're doing."

His comments are an indication of the importance of cash flow as the lifeblood of a business, and of course the related importance of prompt payment in order to keep cash flow looking healthy.

Apocalypse Now

For long-term zombie businesses, there might be little sense of urgency - after all, interest rates have remained historically low and unchanged for several years so far.

Leniency from lenders and suppliers may also have helped to keep many operational, despite being on the very edge of affordability.

But as the economy improves, there's reason to expect that those lenient conditions will not be around for much longer, bringing on a potential apocalypse for zombie businesses who have not managed to improve their trading status.

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Mr Frampton explains:

"Just paying the interest on debts or constantly renegotiating with creditors could leave businesses in limbo: they will be in business but with little chance of growth.

"Once interest rates rise and sustained economic growth encourages creditors to get tougher, even these two options will be tricky."

The key to all of this is cash flow - just as a real-life zombie needs a constant supply of brains, your business needs steady and reliable income to stay afloat.

If you have survived as a zombie business for an extended period of time, there is a good chance that you could become profitable, given a little self-discipline in terms of cash flow.

As such, focus on tightening your own credit control before your lenders tighten theirs - you want to be ahead of the curve, not playing catch-up.

Be very careful about extending lines of credit to customers when your cash flow is still under threat, and be prompt to invoice when payment is due, to keep as much of your finances in your own bank account as possible.

Finally, pursue for payment if it does not show up promptly - channel your inner zombie, think of that unpaid invoice as a juicy human brain, and stop at nothing until you have it in your cold, undead, zombie grasp.

For more zombie apocalypse debt recovery and credit control advice visit us at the bunker contact us today.

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