What is a Zombie Company?

Ever feel like your company is just shuffling in circles? Doing just enough to get by, but not enough to actually go anywhere? Have you considered that your company might be undead?

The term zombie company was first coined in the 1980s, gaining popularity amongst economists referring to Japan’s credit-happy, loss-making businesses which – despite billions in losses – received bailout after bailout from government-backed banks to keep them afloat during The Lost Decade. The justification for these loans was to keep people in work and to lessen the blow of recession on the Japanese economy.

Back in the present day, zombie companies have become a drag on the UK economy. They’re defined as companies that make enough revenue to service the interest on their debt, but not any profit, or (worse still) need constant cash injections to stay alive. They tick over; not dead, but not really alive, either. It’s not brains that zombie companies crave – it’s cash.

The problem with zombie companies isn’t that they’re necessarily destined to fail – many are able to cover their fixed costs (including rent, payroll and suppliers) for years or even decades – but that they aren’t able to invest in expansion, or research & development, or contribute to economic growth. They’re an economic hamster wheel.

In 2018, Reuters reported that zombie company numbers had risen five-fold since 1987 across western Europe, the USA, China and Australia.

For many large zombie companies, such as Japan’s Daiei supermarket chain, their fate is inescapable. With billions in debt and hulking corporate structures in need of an overhaul, a fast turnaround is all-but impossible. Instead, these firms lumber from repayment to repayment while enduring lengthy restructuring programmes.

For smaller firms, dezombification is a possibility.

Things to do in business when you’re dead

While zombification in humans is usually caused by viral infection (or occasionally voodoo magic), zombie companies are usually the result of restricted revenue and cash flow. A healthy company will have earnings that exceed their expenditure – but in zombie companies, outgoings are equal to or greater than their revenue.

So, to return to health, zombie companies must either reduce their outgoings or increase their earnings. Either that or a bullet to the head.

Restructure your debt

Traditionally seen as a meaningless money-shuffling exercise for big firms, if you’re weighed down by a multitude of credit cards and loans, a bit of consolidation could actually do you the world of good.

Speak to your bank, an Independent Financial Advisor or an alternative lender to see if you could put all your eggs in one lower-interest basket. Even if it means the term of the loan is longer, reducing your monthly payments could free up cash to be used on growth.

Declutter

A quick cash injection can be a great way to pay down some debt and reduce your monthly outgoings. Does your business have any assets or equipment you don’t need anymore?

Old computers, furniture, or even intangible assets like trademarks and patents can all be offloaded to get some much-needed capital into your business. Go on an eBay spree, and you’ll come out the other end with a wad of cash and a cleaner office.

Raise your rates

It’s good to increase your prices every so often, and a zombified company is just about the best reason to bump up your day-rate. If your revenue and expenses are roughly the same, even a 5% increase in rates across the board can be enough to tip you over into profitability and break your undead curse.

Review your suppliers

A big chunk of your spending every month probably goes on business necessities like broadband, postage, and insurance. Research by comparison service SimplifyDigital found that people who switched broadband providers regularly saved big – sometimes pocketing over £350. Switching suppliers regularly to take advantage of introductory deals and falling prices is the best way to keep your bills down.

So open up your online banking, go to the Direct Debits tab, and review each and every supplier to see if you could be getting a better deal elsewhere, or if you can ditch them entirely.

Ask HMRC to defer your payments

If your Corporation Tax payment is coming up and you don’t have enough cash in the bank, you may be tempted to turn to loans to make sure you pay HMRC on time – but HMRC itself could prove a better source of credit and you may be able to negotiate an arrangement to pay over a longer period of time.

Known as a Time to Pay (TTP) arrangement, it is designed to help businesses that are fundamentally viable but experiencing temporary cash flow problems.

If HMRC believes that your company is nearing insolvency, they may act quickly to recover their money, so a TTP arrangement is only for those businesses that are fundamentally profitable.

Our advice is to always be proactive with HMRC – don’t wait to be contacted by them because your tax payment was late. The existence of Time to Pay arrangements indicates an understanding by HMRC that problems will arise, and a willingness to help under certain circumstances, but the responsibility remains with you to initiate contact.

Our article on fines and late filing penalties could be useful.

Salvation is at hand

Your business may be a mumbling, calcified wreck, but the best cure is a bit of dedication and careful planning. Stop feasting on brains and instead gorge yourself on rigorous cash flow management, and you can return to profit, growth, and health.