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How Will Making Redundancies Impact Your Cash Flow?

Choosing to make redundancies is an incredibly hard decision for any business. But with the government’s furlough scheme coming to an end and many businesses’ survival at stake, for some it is the tough reality of running a business during the coronavirus pandemic.

Understanding your cash flow position can help you make these business-critical decisions and weigh up your options when it comes to making redundancies. A solid cash flow forecast will give you the confidence you’re making the right decisions to help your business survive.

Preparing for the end of furlough

There’s a lot to consider when making redundancies. Staff costs can be one of the greatest expenses to businesses, yet employees are also often a company’s biggest asset.

For many businesses in the UK, the furlough scheme was a lifeline to help them retain staff. The Coronavirus Job Retention Scheme saw the government paying 80% of wages so businesses could furlough employees. At time of writing (14th June 2020) 1.1m companies in the UK were furloughing 9.1m members of staff, with the total value of job retention claims made sitting at £20.8bn.

However the scheme is now set to end on 31st October 2020. The scheme will taper down gradually – from 1st July employers can bring back employees to work for a set amount of time, and claim through the grant for any hours not worked. Then from August onwards, the level of grant will be reduced each month, with 70% of wages covered in September, reducing further to 60% for the last month of the scheme in October. From August employers will also have to pay National Insurance and pension contributions for their employees.

In addition to the job retention scheme, many small and medium-sized businesses have applied for the Coronavirus Business Interruption Loan Scheme (CBILS) or the Bounce Back Loan Scheme (BBLS) to quickly access finance during the outbreak. It’s estimated over 93,305 businesses applied for support through CBILS. While these loans provided financial support at a critical time for businesses, after 12 months the interest, fees and repayments will kick in – all of which will affect business’ cash flow.

As the world slowly returns to a ‘new normal’, businesses are looking at anything but business as usual over the months ahead. In a post-furlough landscape, businesses in the UK and beyond are weighing up the options of bringing furloughed staff to back to work, or making small scale or collective redundancies.

Planning for redundancies

If it’s looking like making redundancies is your only option, then it’s time to jump into your cash flow forecast and work out the best way forward.

This is where scenario planning is going to become your number one tool. You can try out different scenarios and immediately see the impact on your business’ cash flow.

We suggest you create at least three scenarios: best case, worst case, and the most likely scenario. These should take into account which roles will be made redundant and when, as well as changes to furlough payments. Remember, in the UK you can start the redundancy process even for employees who are on furlough.

If you’re a Float user, start with your realistic ‘base’ scenario, then create the other scenarios from there. For speed, you can duplicate existing scenarios in Float, so if two potential scenarios are similar, this will save you time creating the second one. Once you create a scenario you’re happy to move forward with, you can move budgets into your existing forecast at the click of a button.

scenario duplication

Scenario planning will help you make business decisions that will affect not just the next few months, but the long-term future of your business too. Long-term cash flow planning is an important habit to develop now to keep your business finances healthy throughout unpredictable times ahead. Effective scenario planning should give you the confidence to make tough decisions about redundancies with the knowledge that it’s a necessary step to keep your business afloat.

On a final note, it’s important to consult an HR professional to ensure you have an understanding of all the legal requirements involved in making redundancies, otherwise you could be leaving yourself open to unfair dismissal claims.

Want to try out scenario planning to map out your redundancy options? You can sign up for a free 14-day trial of our cash flow forecasting software today. Try it now >

Visit our COVID-19 Hub for help and support for your business through this difficult time.

Further reading:

How To Make Operating Cash Flow Decisions On Fact, Not Fear

Louise Bayley-Boyd

Content Manager and digital enthusiast, fuelled by coffee and horror films.