With almost every headline referring to the ‘credit crunch’, the current economic climate is unpredictable. Some experts speculate that this may spiral into a full recession, lasting for two years or even longer.
Statistically it is likely that your company will be financially affected in some form, whether due to its own financial position or a customer’s or supplier’s financial difficulties. Rather than succumbing to the doom and gloom, businesses should plan ahead now and work out how best to minimise their liabilities and retain flexibility.
In support of this pragmatic approach, several of our experts have compiled advice relevant to corporate, property and employment law.
Corporate
Careful planning and review of your internal and external procedures will help you through difficult times. Here are a few practical tips for you to consider:
1. Debt Management
Review your debt management procedures, in times like these you need to be a lot more proactive. May be (depending on the size of your company) employ a debt collection agency or a factoring company. It might also be worthwhile speaking to your bank manager to see what other financing options are available to you.
2. Customer Credit
If your cash flow is tight, you may no longer be able to give credit to new and/or existing customers.
3. Overdrafts & Loans
Review your overdraft facilities and other loan arrangements that you have in place with your bank manager and/or where possible make early repayments.
4. Budgets & Strategic Planning
Review your budgets regularly and see whether you are hitting targets and if not revise and adjust your plans/budgets accordingly to avoid cash flow problems.
You may also wish to engage your accountants to carry out a strategic review of your business, to comment on its profitability and to develop a long-term financial strategy to ensure survival in the current economic climate.
5. Marketing
Look at your marketing strategy- are you reaching customers effectively. Do you have a website? What other tools are you utilising to make yourself known- are you attending trade fairs and other networking events?
6. Protect Your Goodwill
In most cases, goodwill contains an element of intellectual property, which you should protect, such as by way of trademark. Nowadays protection of your intellectual property is imperative to protect your company’s interests.
7. Terms & Conditions
Think about your client/supplier relations, in particular your terms and conditions to ensure that you are not exposing yourself to any unnecessary risks (it is recommended to review your terms and conditions every 2-3years).
8. Market Share
Try to increase or at least maintain your current market share. It is likely that you will have to review your sales practices whilst identifying new sales channels (including training, revising targets amongst others).
9. Other
Consider your office supplies, such as stationary, telephone/internet service providers amongst others. You might be able to find a cheaper supplier
Getting the foundations of your business right is one thing, but remember that in business you can never rest on your laurels. In order to remain successful you will continuously have to monitor your internal and external processes and relationships.
Property
One concern to most businesses will, of course, be the cost of its business premises and the ability to downsize and adapt to market changes. Most business premises are leased and below are some tips on what you should consider before entering into or renewing your business lease.
1. Consider a Shorter Lease Term
We are already seeing evidence of tenants taking on shorter-term leases. For example, a lease of 5 years rather than say 10 years reduces your period of commitment and the overall amount of rent your business has to pay over the lease term. Shorter leases also mean that the amount of Stamp Duty Land Tax you have to pay is usually less. Furthermore, leases under 7 years do not have to be registered at the Land Registry so there is less ‘red tape’.
2. Negotiate a Break clause
A break clause can provide flexibility and assurance if your business is experiencing a downturn. By negotiating a break clause, it means that you can end your lease by giving written notice to the landlord at a specified future date (or dates). This will usually be conditional on paying the rent and making sure you have complied with your other lease obligations. If the break clause is not exercised, then the lease continues as normal.
3. Check The Alienation Clause
If your business takes a turn for the worse, make sure you can assign (i.e. sell) the lease or sub-let the property. Most commercial leases contain these so-called ‘alienation’ provisions but it’s best to check that there is nothing onerous which prevents you from offloading your lease. Make sure that the landlord’s consent cannot be unreasonably withheld or delayed.
4. Rent Review Clause
If there is a rent review clause in your lease, negotiate one that’s linked to the RPI rather than an upward only review. This will give you more certainty when it comes to rent review rather than leaving the gap open for an uncertain increase in rent.
5. Ask For a Rent-Free Period
Landlords are increasingly agreeing rent-free periods to ensure that a tenant takes a property on and settles in during the initial months, so don’t be afraid to ask for one. If there’s a break clause in the lease, you could also request an additional rent-free period if you do not exercise a break. This provides an incentive for the tenant to stay at the property whilst saving the landlord from going through the often long and painful process of finding a new tenant.
6. Cap the Service Charge
Service charges can often add a substantial amount to the cost of a lease in addition to the basic rent. Ask for the service charge to be capped during the lease term so that you know what the maximum amount is which you will be paying.
7. Limit the Repairing Liability
Most commercial leases contain fully repairing covenants which means that the tenant must keep the property to a high standard which can have serious financial consequences. Depending on the condition of the property, try and limit your repairing liability by reference to a schedule of condition so that you don’t have to put the property into any better state of repair at the end of the lease term. This makes even more sense if you are only taking on a short-term lease.
Remember that you are operating in a buyer’s market at the moment and there are many commercial properties that are currently vacant. A landlord would rather have a tenant in occupation, paying rent and preventing the risk of squatters rather than own an empty property!
Employment
Job cuts are one of the first things that businesses consider during hard financial times, however, if this is publicised it can give the impression of a failing business to the outside world. Here are some alternatives:
1. Improving Efficiency
Rather than looking to get rid of the most underperforming employees, businesses should consider ways to improve their employees’ efficiency. This can be done by carrying out performance reviews and introducing targets, training management to get the best out of their staff and offering performance-related perks. A re-organisation of roles may also have the desired affect.
2. Cutting Absences
Sickness absences cost UK businesses millions of pounds each year. Introducing or upholding a structured sickness policy will help prevent non-genuine absences. Many employers do not realise that it is possible to discipline staff for excessive absence, provided a consistent and clear policy is followed and any disabilities are taken into account. If your current contracts provide for generous sick pay provisions that have become costly for the business, consider changing these as an alternative to redundancies.
3. Buying out Benefits
Businesses should look into which staff benefits are the most costly and consider offering an incentive or alternative to employees to encourage them to give the benefit up. A healthcare plan where employers can get bulk discounts may be more appealing to staff than a pension contribution. It is also worth looking into which benefits are most tax efficient.
4. Temporary Measures
Instead of drastic permanent cuts, businesses should consider temporary options, such as offering staff career breaks, seconding staff to other businesses or group companies and lay-offs.
5. Outsourcing/Selling Part of the Business
This is a particularly attractive option if part of the business is underperforming. Usually, when a business is sold or outsourced, the purchaser or incoming contractor will take over the responsibility of the employees working in that part of the business. It is important to ensure, however, that during negotiations all future liabilities are assigned to the purchaser or incoming contractor.
6. Retirement
Consider whether any employees are coming up to retirement age. You are required to give at least 6 months notice, so it is wise to be aware of employee’s retirement dates and act leaving plenty of time.
7. Voluntary Redundancies
Offering an additional package will often encourage staff to leave of their own accord. Requesting volunteers for redundancy may also route out less committed staff members in the organisation. Sometimes, just offering a payment in lieu of notice is sufficient incentive to attract volunteers.
Many of the above options could amount to a breach of contract if proper procedures are not followed. Businesses are therefore advised to seek employment law advice before embarking on a course of action.
If you wish to discuss any of the above issues further please contact us.
