What is a ‘zombie’ business and how you can survive the apocalypse

In the next 100 days, Australia could be faced with a surplus of failed businesses.

By September, JobKeeper will officially have ended. That means businesses will be forced to stand on their own two feet and live or die by their own economic recovery and profitability.

It’s a harsh reality, but one that many businesses will face. Prime Minister Morrison has no intention of expanding the JobKeeper scheme saying, “Left in place for too long they (stimulus packages such as JobKeeper) will dull the dynamism of the economy and prevent the adjustments that must necessarily take place to enable new jobs to be created and our economy to move forward.”

There are approximately, 844,000 businesses that have accessed JobKeeper, subsidising or replacing the wages of 3.5 million Australian workers. 

Many of these businesses will now effectively become ‘zombie’ businesses.

What is a zombie business?

Six hundred businesses would have collapsed in non-COVID-19 conditions.

That’s the finding from CreditorWatch, that recently stated that Australia should brace itself for a spate of insolvencies.

Those 600 businesses have been kept alive by government stimulus packages. Yet, when the stimulus is withdrawn in September these businesses will have to stand on their own two feet.

It is unlikely they will.

So, effectively, a zombie company is one that earns just enough money to continue operating and service debt but are unable to pay off their debt. 

The term was coined in Japan between 1991 and 2001, during a period of serious economic stagnation in that country. It came about following the collapse of Japan’s economy during this time after it looked as if the country would become a world leader in manufacturing, property investment and banking. 

When Japan’s asset bubble burst, larger companies were kept afloat by government supported banks to keep their people in work, avoid a recession and protect savings.

Zombie companies scrape by meeting overheads, yet have no excess capital to spur growth. They are usually just one event away from a market disrupting event that would cripple them for good. They are also highly susceptible to poor quarter performances, which would also see them become insolvent.  

These companies rely on bailouts and government hand-outs.

Fortunately for these ‘living dead’ or ‘zombie stocks’, they were saved this year by government handouts to combat COVID-19.

What can businesses do to save themselves post COVID-19?

If you have a business that would have collapsed in the normal economy, it’s time to start thinking about how to turn your fortunes around.

How can you put your accounts in order, meet your taxation and superannuation obligations? What strategy do you need to put in place to turn the business around? Do you need to engage a business advisor to help you make the hard decisions that will inevitably be made?

That’s a lot of questions to ask of yourself, but sitting down and working through these issues could be the difference between folding and moving forward.

Here are the five things you should do right now …

  1. Renegotiate terms

Communicate with your suppliers, creditors, landlords and bank and come to an agreement on new terms that are beneficial to all parties. This includes reducing rents and loan repayments. If you can lower your costs, you’ll reach profitability sooner. 

  1. Cut costs further

You may need to make some hard decisions, which could include downsizing staff. If that’s the case, don’t forget they are human, so treat them as such. Communicate with them properly, help them understand the situation and help them transition out of the business. Further cost cutting acts could come in downsizing the office (perhaps everyone could work from home) and eliminating any non-essential business expenditure.  

  1. Talk tax

Approach the Australian taxation Office (ATO) and honestly explain the situation the business is in. More often than not, they will facilitate a payment plan.

  1. Understrand that stimulus will end

JobKeeper is ending in September. As such, the money the government is giving you to pay your employees will dry up. The quicker you come to terms with this fact, the easier it will be for you implement cost cutting measures and strategy goals.

  1. Treat your customers like kings

If you are guilty of treating your customers like, well, customers, it’s time to treat them like kings. Know who they are, understand their needs and turn them into loyal lovers of the business who will keep coming back. Start acting like your customers matter and you’ll not only keep the old ones, you’ll attract new ones and bring new revenues into the business. 

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This update is not financial advice. This article is general news and information.