Life after furlough – what you should be thinking about now
Although it is less than two months since the start of lockdown, for some it probably feels like a lifetime. In this time, you have probably been busy working on some or all of the following:-
- Deferring the VAT for the current quarter;
- Deferring some of your PAYE/NIC payments;
- Deferring partners’ tax payment or your corporation tax payment;
- Updating your cashflow forecasts;
- Applying for a loan or an extension to your existing overdraft facility;
- Furloughing staff and either have made or are in the process of making your first claim
In addition to this, many firms had a better than expected March, when it was predicted that everything would fall off a cliff, and lots of firms have told us that April turned out to be better than the Doomsday prediction made at the beginning of March.
Furlough has been the main support that the Government has given to law firms, as most will not qualify for business rate grants, and all the other measures that are helpful at the time of the crisis are really only pushing the issue further down the road to be dealt with another day.
In terms of the percentage of staff furloughed, this has varied depending on the type of work that firms deal with. For a mixed practice, the average appears to be around 40%.
We know that the furlough scheme will continue until at least the end of June, which gives an element of comfort when planning forward, and the Chancellor has promised that there will be no cliff-edge end to the scheme.
All firms should continue to monitor the activities within each department, and the option to furlough staff should be reviewed on a weekly basis. Many firms seem to have only looked at this once or perhaps twice so far, which is not the right approach when workloads are constantly changing.
The furlough scheme has provided a short-term cushion for many firms, and together with the increased level of billing activities and the other deferment measures mentioned above, lots of firms are finding that cash is better than they predicted at the start of this crisis.
The challenge for all law firms that have used the furlough scheme is knowing what to do when the furlough scheme ends, and the salary bill goes back to normal. This is the planning that all firms need to be focused upon, as getting this wrong not only depletes profits but more importantly will absorb cash very quickly.
The obvious area to look at is conveyancing, which has been one of the hardest-hit types of work. Lots of transactions have ground to a halt, and firms are hoping that these will continue post lockdown, but what about the market itself? How quickly will the property market come back? Will transactions in the very early stages fall over as clients try to renegotiate prices? Will the choice of mortgage products become even more restrictive?
Each department will have its own challenges. It is a case of recognising what they are and working out how best to respond to them.
With a potentially slow recovery predicted, work will take longer to complete, which means that the working capital cycle will grow, increasing the length of time it takes to generate cash.
A key aspect of a successful Return to Work Plan from a financial perspective will involve the careful planning of how staff return to work. Many people on furlough will assume that they will simply return once furlough has ended. However, how can any business afford to bring back staff full time when the demand is not there? Good communication will be required to set out everyone’s expectations.
Ideally, staff should return to work in line with demand. This may involve staff working shorter hours, with pay being adjusted accordingly then gradually increased, in accordance with employment law regulations. There are a lot of alternative ideas, but whichever approach you choose, it has to be something that works for your firm.
This is not an easy task, as one thing we have all learnt so far with the current environment is that everything can change so quickly, and therefore plans need to be fluid.
Many firms will have already prepared forecasts, hopefully to at least April 2021, showing what the impact of the deferment of VAT and income tax payments will be, and therefore they can see the way that cash will be absorbed very quickly during the period when they are trying to rebuild work in progress. By managing the return to work carefully, the improvement it can make to a firm’s cash position can be significant.
If it is not already on your list of things to do over the next few weeks, then I would highly recommend that you model a Return to Work Plan for all departments in terms of looking at demand versus inputs, as each department will have a different speed of recovery. Share the modelling with the Heads of Departments, as this will need a buy-in from all for it to work, and more importantly be prepared to keep updating it as things become clearer!