What are Zombie companies and what to do if your company becomes one?

After the collapse of the Japanese asset price bubble in the 1990s, the term ‘zombie company’ was applied to Japanese firms that were funded by Japanese banks during the ‘Lost Decade’. Daiei, a Japanese retailer, is an example of a huge firm that grew rapidly in the years preceding the 1990 crash and is now considered a ‘zombie company’.

The main issue with zombie businesses is that they are caught in a constant state of inability to foster business growth, despite the fact that many can cover their fixed costs, such as rent, payroll, and suppliers, for years or even decades. They can't, however, invest in expansion or research and development.

What are Zombie companies?
Zombies are businesses that make just enough cash to stay afloat and service debt but are unable to repay it. Given that they barely scrape by to meet overheads (wages, rent, and debt interest payments, for example), such businesses have no surplus cash to invest in growth.

Zombie companies face higher borrowing rates and could face insolvency or a rescue if a single unforeseen event occurs, such as a market interruption or a poor quarter performance. Zombies are particularly reliant on banks for funding, which is essential to their survival.

Although the term was coined to describe Japanese businesses, it has since spread to other countries, including the United Kingdom, which means that zombie businesses are now a burden on the UK economy as well. They're characterised as businesses that generate enough revenue to pay interest on their debt but not enough to earn a profit, or that rely on constant cash to stay afloat.

Many economists argue that the presence of an estimated 150,000 of these businesses is stealing market share and locking up talent that might otherwise be available to more dynamic and less indebted businesses.

What should I do if my company becomes one?
Zombie businesses are often the result of a lack of income and financial flow. In a healthy company, earnings outweigh expenditures; however, in a zombie company, outgoings are equal to or more than revenue.

With this in mind, we'll go over some of the steps you can take to avoid becoming a zombie company, as well as what to do if you do find yourself in this situation.

Confront the core issue

Businesses that admit they have a problem and commit to fixing it have a better chance of succeeding. They should examine the issue and make rapid modifications that will have the greatest impact on cash flow and revenue. Setting goals and devising a strategy to achieve them is critical. The goal is to respond fast and decisively.

Gather crucial and relevant information as soon as possible

In the short term, it may be able to restructure or extend existing financial credit, thus it is critical for firms to communicate with financiers and suppliers to gain as much breathing room as possible.

Communicate with your customers

If the company needs to make adjustments to its invoicing schedules or payment conditions, it's vital that they inform customers immediately in order to maximise the value of any goodwill and encourage early payments. To get income coming into the organisation as rapidly as possible, consider offering extreme discounts or specials.

Stop adding more costs and expenses

Businesses in distress should simply purchase the bare minimum of inputs to keep their operations running. Inventory should be managed in line with sales, and a strong focus on customer service can assist in increasing revenue.

Defer payments

TTP (Time to Pay) arrangement is intended to assist firms that are fundamentally viable but are facing temporary cash flow issues.

HMRC may act fast to collect their money if they believe your firm is on the verge of going bankrupt. You must keep in mind that this arrangement is only for businesses that have proven to be viable but are currently experiencing temporary cash flow issues.

If you find yourself in this circumstance, being a zombie corporation is a difficult condition to deal with and may be incredibly frustrating. Persona Finance can take care of all of your tax responsibilities and obligations so you can focus on your business needs and avoid this situation at all costs. We currently provide a range of services, such as bookkeeping and timely filing of company taxes. Please contact Persona Finance at [enquiries@personafinance.co] for additional information.