Do You Run a Zombie Company?

Imagine running a company which is only able to pay off the interest on its’ debt, and lacks the capacity to invest into future growth, or to pay off the capital of its’ debt! We call this a “Zombie Company”. The term simply means that the company is neither alive and kicking, nor dead and buried, instead, it continues to trade (in the short or medium term) without any realistic chance of long term survival.

You’ve also locked key resources and talent away from prospering businesses, and that means certain industries could be struggling when they shouldn’t. A talented director with a stellar track record should not be spending their days managing a directionless operation. Surely his or her time could be better spent directing a business with the scope to grow and succeed.

Ticking along under the “zombie” framework comes with a number of risks, not least the fact your company’s entire existence is built around the current economic parameters. Nothing is possible and everything is an effort.

The economic parameters can change at any given moment, and in the present day, probably will, simply because companies are constantly looking to move out of their poor financial state by taking advantage of brand new opportunities which could garner more profit or cash flow.

For example, during the Covid-19 Pandemic, instead of waiting around; pubs and restaurants may have transitioned to an online model, where food and drink can be purchased over the internet and transported to people’s homes.

Adapting like this can only happen if your company has the ability to shift focus without the financial restriction that comes from being a “zombie company”, and the fact competitors will be actively shifting their operation like this to combat things like coronavirus, your company could be left falling even further behind, or even worse, staring down the barrel of permanent closure.

So, what kills off zombie companies once and for all?

– An increase in the Bank of England interest rate by the government could make debt repayments unavoidable.

– A further fall in turnover may leave a company unable to even pay the interest on its debts.

– An increase in costs could squeeze profit margins to the point where costs exceed turnover.

It’s important to take stock and focus on the key indicators which may suggest you’re heading towards a zombie framework. Is your company struggling to pay even the most basic day-to-day running costs? Does the idea of growth seem an impossibility? And can the company pay interest but not afford to settle the underlying debts? The first step in dealing with this would be properly understanding your company’s current situation.

Accepting that it’s a zombie company will ensure you’re in a position to put things right. So, what are your options? Well, you can either blast through your current operation and restructure the entire framework from the ground up, or you can simply call it a day. The former means understanding whether there’s a business really worth saving. For example, is management prepared to do what it takes to make the changes necessary for the company to thrive? The latter may mean placing the company into liquidation or administration!

The quicker you act, the easier things tend to be. Options decrease over time and as every day passes, you may see more cash wasted. The sooner you discover the company is becoming a zombie, the earlier you can implement counter-measures.

If you’re faced with the prospect of becoming a zombie company, or find yourself already locked within this predicament, we can help you! Contact the team at RG Insolvency today, and we can discuss the most effective procedures to ensure your company can be phased out in the most dignified and cost-effective way possible.