Avoiding The Horrors of Becoming a North East Zombie Business

Derek MairSCT

Dictionary publishers are always reflecting on updates to our language, announcing the latest words and phrases they have adopted into their new editions.

In recent years we’ve accepted ‘twerking’ and ‘selfies’ but a relatively new phrase may be heading into the north east lexicon – the zombie business.

The description ‘zombie business’ came into popular parlance in the UK during the banking crisis and subsequent recession. It refers to a company which is neither alive nor dead; a company which is operating solely to repay debt and is surviving rather than thriving with no cash or capacity to invest or grow.

It’s a scenario which was avoided, by and large, by Aberdeen businesses during the wider UK recession as oil prices rose, hotels were full to capacity and there was a job for everyone who wanted one.

But the oil and gas recession which hit the estimated 900 companies serving the energy sector in Aberdeen directly in 2015 is now hitting SMEs across all sectors. An estimated 65,000 jobs linked to the industry have been lost with more expected in 2016. Some 85% of those surveyed for the Aberdeen and Grampian/Bond Dickson Oil and Gas Survey in November 2015 said that redundancies will continue this year. This curtailment of business and individual spending power is hitting businesses of all sizes and sectors.

Derek Mair, a partner at Aberdeen-based independent accountancy firm Hall Morrice, has advice for north east businesses on how to avoid the zombie trap and how to get out of it and back to the land of the living.

Know Your Exact Financial Position

“When some firms realise that liquidation could become an option, they seek assistance. But at this point they often present with little or no firm management accounting in place. Some have only had contact with their accountants on an annual basis to prepare accounts.

“Only by having robust management accounting in place can managers know the full position. Anything less frequent than monthly management accounts are historical. It’s a trait of a zombie company that they can’t invest as they have no cash flow but this has to be a key priority to avoid business collapse.”

Basic Bookkeeping

“When times are difficult, it’s understandable that some may want to avoid the full picture, but by implementing some basic book keeping and tough credit control then cash flow can be improved. Have a regular review of your debtors list with managers and don’t be afraid to operate a stop list for the worst offenders. Be sure to run credit checks on new clients also. The last thing you need in this position is to attract further debt and it’s easy to forget the basic processes in the rush to make new sales.

“Can you introduce incentives such as discount for early payment by clients? Do you have a list of your clients’ payment run dates? Most companies pay on or around the same time each month and some basic book keeping in noting these dates will help you to spot when expected payments have not been made to allow you to start following up the payments with them.”

Work on Your Business Not In It

“When business owners, directors and managers are facing a zombie crisis, many can default to a hands on position; often doing a job in the business they perhaps started out in and enjoyed seeing this as getting stuck in with everyone, being hands on and finding new sales. But this is not where to invest your time.

“A leader should step back and take a wide overview of the business, spending time driving new strategy and objectives and identifying new achievable targets. Working ‘at the coal face’ can actually dig the business into a bigger hole.”

Be Honest

“If you are facing making cut backs then let staff know and invite their suggestions. Some team members may be better placed to identify waste and areas where savings can be made with new efficiencies. Treating 20 staff to a coffee shop treat every Friday can cost around £1,500 a year. A saving like this will not save a company in a zombie position, but several staff ideas like this will help and will make staff feel involved. Be honest with managers and identify which financial metrics are the most important so that they can focus their teams on this.”

Communicate

“Talk to your advisors – especially banks and lenders. Show them the full position and outline what you are doing to improve the situation. Don’t wait until crisis point to discuss things with them and then expect their immediate, last-minute support.

“Also remember that there may be a swathe of other professional advice out there to help. There are business mentor schemes available across Scotland to pair you with a business leader who can provide practical support, knowledge and experience”

Negotiate

“One of the first signs of the oil downturn was when businesses involved in this field started to send out letters requesting reductions in the rates they were paying for everything from stationery to marketing services. Consider which of your suppliers you can negotiate with. Will your landlord talk about possible restructuring of payments?

The Future

“My thoughts are that is the current rate of interest continues – predictions are that there will probably be no change to interest rates in 2016 – more companies will be placed in a zombie state.

“The low cost of finance will allow come to continue meeting their ongoing interest liabilities, but little else. Were interest rates to rise, this could force banks to place some of these companies into liquidation”

Founded in 1976, Hall Morrice is one of Scotland’s leading independent firms of chartered accountants and has offices in Aberdeen and Fraserburgh. Based at 6 & 7 Queens Terrace in Aberdeen, Hall Morrice can be contacted on 01224 647394 or at accounts@hallmorrice.co.uk