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Stumbling along

The supports given to businesses during the coronavirus crisis have propped up firms that were unsustainable before the pandemic or have become unsustainable as a result of the changes we have seen over the last 18 months.

The result is an increase in what are known as ‘zombie’ companies. These are defined as companies that earn just enough money to continue meeting their overheads (wages, rent, interest payments on debt, for example) but are unable to pay off any of that debt and don’t have any excess capital to invest.

The proportion of businesses that fall into this category is hard to quantify, with estimates ranging from one in eight to as many as one in five.

Zombie invasion

Low interest rates have contributed to the survival of many zombie companies through relatively low debt servicing costs. Rates have been at record lows for more than a decade and there is no indication that they will rise significantly any time soon.

In addition, governments are motivated to keep these businesses afloat to keep their employees off the unemployment register.

State supports such as the furlough scheme have kept untold numbers of zombie companies from teetering into insolvency. Second quarter data from the Insolvency Service of Ireland shows that the number of approved insolvency arrangements fell by 7.4% compared to the first three months of the year.

Walking dead

You might wonder why there is so much concern about businesses that continue to trade and pay their bills. But when a company is only treading water there is no incentive to invest in new processes or personnel to boost productivity, while the funds used to keep it going could be more productively used elsewhere.

In cases where the zombie company is both a supplier and a customer to other businesses, the knock-on effect can be considerable. Those that are ‘revived’ are more likely to become unsustainable again because their underlying weaknesses may be very difficult or impossible to eradicate.

The data available from a cloud based accounting package such as Big Red Cloud can be used to identify when a business is lurching into zombie territory. At this point it would be prudent to seek professional advice in order to make an informed decision about the future of the company. 

Don’t panic

This might seem like the point at which we should start panicking about the undead choking the post-pandemic recovery, but the reality is rather less terrifying.

For one thing, government support has also propped up thousands of small businesses that have solid business models, sound management teams and balance sheets that were positive before the virus decimated their industries. These businesses deserve to be given the chance to get back on their feet.

In addition, there are plenty of investors looking for ways of generating a return on their money who might fancy turning a moribund business around. If we have learned anything from the movies it is that even a zombie story can have a happy ending.

Marc O'Dwyer

After completing a Graduate program in Marketing, Marc’s impressive sales career began at Allied Irish Banks, Pitney Bowes and Panasonic where he received numerous Irish and European sales performance awards and consistently exceeded targets and expectations. In 1992, Marc’s entrepreneurial spirit led him to set up his own business, Irish International Sales (IIS). Initially, this company was a reseller for Take 5 Accounts and Payroll software. Within four years, IIS became the largest reseller of Take 5 in Ireland, acquiring four other Take 5 resellers. He also found time to set up two mobile phone shops under the Cellular World brand and a web design company offering website design services for small businesses. In 2001, he bought the majority share in a small Irish software business, Big Red Book. At that time, the company was losing money. The company became profitable within two months, and Marc then acquired a payroll company to compliment Big Red Books Accounting products. In 2003, IIS were appointed as Channel Partners with SAP for their new SME product, SAP Business One. Marc sold his Take 5 business and concentrated on developing this new market for SAP As a result, by 2007, IIS was recognised as the largest Channel Partner for SAP in EMEA (Europe Middle East and Africa). In 2008, the IIS Sales Manager bought the Company from Marc in an MBO. He launched Big red cloud in June 2012, the online version of big red book, to date the company successfully converts 59% of trials into sales and the number of customers is growing rapidly. Marc continues to run both Big Red Book and Big Red Cloud which now support 75,000 businesses. He is a very keen sportsman, having played rugby for 20 years, represented Leinster at under 16 and under 20 levels, and league squash with Fitzwilliam Lawn Tennis Club for 10 years. Marc has competed in 11 Marathons, including the London and Boston Marathons, and has completed several Triathlons and Half Ironman races. He has also completed six Ironman Races in Austria(x2), Frankfurt (Germany), Nice (France) , Mallorca (Spain) and Copenhagen (Denmark)

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