We asked Samuel Phillips Law how business owners can cut down on their overheads
Legal experts Asam Khan, Phoebe Gogarty and Thomas Cumming tell us what employers need to consider before making any rash decisions…
As the cost of living continues to rise, many small business owners are looking to cut down on their spending.
For all the upheaval of the pandemic, the silver lining to come out of the cloud of lockdown was the newfound realisation that employees across so many sectors could work remotely – with a surge in the development of new tech and connectivity apps making ‘WFH’ (as we now know it) easier than ever before.
But could giving up their office be a knee-jerk reaction that employers live to regret? And where working remotely isn’t an option, what smaller changes can be made before business owners have to rely on redundancies to avoid debt?
We asked the legal team at one of the most prestigious law firms in Newcastle upon Tyne, Samuel Phillips Law…
What advice would you give to business owners about cutting down on overheads?
[Asam] It’s important to remember that businesses have to consider both fixed (business rates, eg.) and variable (utilities costs, eg.) overheads.
The costs of variable overheads fluctuate during the year. An obvious example is the cost of heating offices, which increases during the cooler months. Certain businesses benefit from agreeing to pay the cost of heating in monthly payments which reflect the cost for the whole year, and can drastically improve cashflow in the months when usage is high.
Cashflow is fundamental to any business. The inability for a business to satisfy its debts as and when they’re due is the main criteria for how the solvency of a business is determined.
What about fixed overheads?
[Thomas] Let’s use business rates as an example. A business has the right to challenge the basis of valuation, which can lead to a significant reduction in the amount that it is required to pay.
However, this area is fraught with danger due to aggressive and unscrupulous consultants, who offer this service and who are successful in securing reductions but charge significant fees which are payable annually. Great care must be taken to review the terms and conditions when appointing an agent. Ensure that you appoint reputable agents and fully understand what the cost will be before proceeding.
Of course, a business can also seek to challenge the rating assessment itself, as there’s no requirement to appoint an agent. The process has become easier to navigate in recent years, with significant help and guidance available, which could help you avoid the risk of being hit with hefty agent fees at all.
When it comes to reducing overheads, does teamwork make the dreamwork?
[Asam] It can do! There’s always potential to agree reduced rates for common services and consumables by being part of a buying group or association.
Due to their collective buying power, associations can often agree reduced rates on anything from paper and ink toner to broadband contracts, so it’s always worth speaking with other businesses in close proximity to you. If businesses can collectively buy together, they can each benefit from the savings that their collective purchasing power brings.
A significant overhead to any businesses is the cost of servicing debt – will rising interest rates make this even more expensive?
[Asam] Yes, rising interest rates are already increasing the cost of servicing existing debt and funding arrangements and this is likely to continue.
Up until now, businesses have benefitted from having a ready source of funding from a bullish lending market, so debt has been relatively easy for business to access. While this has driven growth and spending, the current uncertainty in the market has meant that funders are now less willing to lend money. Those who are seem to be offering higher rates of interest.
The cost of servicing debt is an overhead that businesses simply haven’t factored into their budgets, not least because the rise in interest rates has been sudden. The option to refinance debt has also diminished due to the lack of funders in the marketplace.
And what can happen to businesses if they’re unable to pay back the required interest on their debt?
[Thomas] Debt default can be catastrophic. It often sets off a chain reaction which business owners sometimes don’t understand.
Increased rates can be demanded by the lender, who has suffered the default. The default may have also broken convenants with other lenders, so while payments have still been made, new defaults occur under the terms of the funding agreement.
A business can very quickly find itself being in default of lending covenants and having its debts called in, or its funding terms renegotiated.
When debt becomes expensive to service or difficult to obtain, a business can look to change its debt equity ratio and must seek to raise investment by releasing equity. This often takes the form of personal investment or investment by third parties, including friends and family, professional investors and/or alternative sources, such as crowdfunding.
The property market is experiencing significant upheaval. Is getting rid of your office worth the hassle?
[Asam] All businesses need a place to call home, but a bricks and mortar establishment is no longer necessary for some businesses. Many can harness modern methods of working to maintain a virtual presence.
That being said, many businesses are still in a period of transition. Historically, businesses have made significant investment in physical offices and many have entered into long- and medium-term commitments. A business which has leasehold premises cannot simply pack up and leave.
Most commercial leases have onerous provisions which are contractual liabilities and must be adhered to or the lease provisions incurs cost. The costs can be substantial, and the exit cost must be factored in from the outset.
A business needs to carefully review its contractual obligations when exiting its premises. Liabilities can be mitigated if a business has an exit strategy. But, often, the liabilities of the business are guaranteed by the founders and owners – which can come as a surprise to many business owners.
If employers feel forced into making redundancies, what are the legal considerations they need to be aware of first?
[Phoebe] Redundancy is a complex area, which can be costly and attract a range of employment claims if employers do not ensure the process is handled correctly.
The legal considerations begin with the test under the Employment Rights Act 1996:
- if the employer has either ceased, or intends to cease, continuing the business or the requirements for employees to perform work of a specific type, or to conduct it at the location in which they are employed, has ceased or diminished, or is expected to do so.
If the employer can satisfy this test as the reason for dismissal, they will then need to commence a redundancy process in accordance with any policy they have in place, which may have been formed by agreement with a trade union.
An important stage of the process is to correctly identify the relevant pool of affected employees who are at risk of redundancy, as the failure to do so could give rise to unfair dismissal or discrimination claims.
Additionally, where the pool affects 20 or more employees, the employer must inform the Redundancy Payments Service of the redundancy process, and minimum timescales will apply for collective consolations before any notices of redundancy can be issued.
Can working with a solicitor to review your contracts with suppliers and clients, and renegotiate their terms, also cut down on overheads?
[Thomas] Potentially, yes. Contracts should always be reviewed regularly to ensure:
- Compliance with the same
- That it remains fit for purpose for all parties.
In the event that you believe you will be unable to comply with a term and/or you are having cashflow issues, it’s better to instruct a solicitor early to advise you on your options.
It may be that a contract can be terminated on the basis of its current terms. It may be that an early exit can be negotiated. Or it may be that the contract is varied to allow it to continue, but on more suitable terms for the parties.
It’s always more cost-effective to get legal advice early on your options, prior to any default.
If you’re interested in finding out more about the potential legal implications of cutting down on your business’ overheads, Samuel Phillips Law can offer advice in the strictest of confidence.
Samuel Phillips Law Firm, Floor 5, General Buildings, 18–24 Grey Street, Newcastle upon Tyne NE1 6AE