Be prepared: Government support will not be there forever – A guest blog by Graydon
2020 will show up in the history books as a year with a record low in bankruptcies. Due to the pandemic, the financial uncertainty it caused, and the huge impact of government support, that might seem somewhat unbelievable. But what is not happening already, is in this case definitely going to come. The question is not whether government support will end, the question is when it will. Will you be ready for it when it does?
Within the stages of the COVID-19 pandemic, business has reached its most uncertain phase. For over a year, society has been running with the brakes firmly applied. Where many companies were initially able to keep their heads above water by relying on the buffers they had built up themselves, they are now at risk of going under. The only thing that is keeping many companies from going under right now, is the support they are receiving from government.
Admittedly, the compensation from government is often not even enough to cover the costs. Combined with other arrangements, including with landlords and suppliers, the support measures do help healthy companies avoid bankruptcy.
But also organisations that were in difficulties before the COVID-19 pandemic are staying afloat due to the government support. These ‘zombie companies’ make it even more difficult for your organisation to estimate the impact of the coming end to government support.
Peak in bankruptcies yet to come
Everybody knows that, sooner or later, government support is going to end. To express the scope of this financial support in figures: in 2020, the UK’s national debt reached the equivalent of 84.6% of GDP. In the Netherlands, the Dutch national debt increased by 42 billion euros. In Belgium, the deficit also increased significantly: from 1.9 percent of GNP in 2019 to 10.1 percent of GNP in 2020.
No matter what else may come of it, this focus on maximum retention of companies and employment has definitely resulted in an extremely low number of bankruptcies in 2020. Figures by Graydon show that in 2020 as many as 33 percent fewer companies went bankrupt compared to 2019. The New York Times has reported that specifically for the UK, this figure is as high as 40%. It is the lowest number of organisations to file for bankruptcy in the past ten years.
Zombie companies are obscuring the prospects
Among those tens of thousands of companies there are those who were in perfect condition before the pandemic. But there are also organisations among them that are only perpetuating their existence by the graces of government support. These zombie companies are a huge risk for your organisation.
Are you going to start doing business now with a company that is going out of business very shortly, once the government slowly but surely puts an end to the support measures? This will create the threat of a domino effect, which could affect your company as well. Because you are missing out on lost revenue, or are unable to provide your products or services, as a result of companies going bankrupt elsewhere along the chain.
COVID-19 Shock Resistance Score
To avoid such disaster scenarios, it is crucial that you gain insight into the financial status of your customers, prospects, and (potential) suppliers. You need to know what impact the coronavirus crisis is having on the usual business operations of these organisations. Graydon translates this into a COVID-19 Shock Resistance Score.
The score, also called the Impact Score, indicates how well a company is prepared to cope with a period of reduced activity or complete closure (i.e. due to COVID-19). In other words, to what extent does it have sufficient reserves to, initially without external (financial) support measures, survive this period? Not a prediction but a reflection of the harsh reality and indispensable if you want to know what your client portfolio is going to look like after the crisis period.
How will you weather the storm?
In uncertain times, financial stability puts companies and employees at ease. We can tell you how you can best put this into practice in our Market Outlook Paper ‘How will you weather the financial storm? – Achieve financial stability in turbulent times’.
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