Changes to the furlough scheme will have financial implications for businesses all over the country.
The UK business community has been extremely grateful for the Job Retention Scheme (JRS), or the furlough scheme, as most of us now know it. During these challenging times, having government contributions towards your furloughed staff’s wages has been a godsend for many owner-managed businesses.
However, with the possibility of staff being able to return on a part time basis from 1st July 2020, and the Government reducing its contributions from 1 August 2020, now is the time to start planning for your team coming back to work, and the financial implications of this return to normal working life.
Daniel Rose runs through the changes to the furlough scheme, and what you should be doing.
How the furlough scheme has been a lifeline
The majority of my clients have made at least some use of the governments furlough scheme. It’s been a lifeline for many businesses that have been badly hit by the COVID-19 crisis, helping them keep their staff in employment and with a regular income, despite the dire financial circumstances that many businesses will be experiencing.
Most sectors have seen a significant downturn in business during the pandemic, and the scheme has enabled businesses to either shut the business down temporarily, or at the very least shrink the workforce down to suitable level to deal with the decreased workload.
Once the scheme changes from 1 August 2020, and businesses are required to incur a cost on furloughed staff, this will be the moment that business owners will need to seriously consider what action they are going to take moving forward.
Bringing your staff back to work
Employees could end up being furloughed until October, which is when the scheme comes to an end. In some businesses, the pipeline work that has built up during lockdown may be more apparent than in others. The difficulty with bringing your team back into the business is knowing that you have sufficient levels of work available to keep them busy, and earn the business money. If there is not sufficient work, the business would be much better off leaving staff members on furlough until the work picks up further down the line.
Some of my clients had brought staff back quite quickly. It was clear from the level of customer enquires coming in that there would be sufficient work for them, and they were able to make the workplace a safe environment to work.
The game changer for many businesses will start on 1 July 2020, when the furlough rules are changing.
Changes to the furlough scheme on 1 July 2020
From this date, furloughed staff will be able to do “flexible working”. In short, this means that staff who have been furloughed for a minimum of three weeks before 30 June 2020 can return to work on a part time basis, meaning the business can still get some government assistance.
This means business owners can make decisions about staffing levels at very late notice. This could mean that businesses can draft in staff to fulfill a client order, complete the order, and then be furloughed again. In some ways, many businesses will be resourcing their company along the same lines as the gig economy – providing work for employees only as and when required, rather than full-time.
As an example, I have a client who provide emergency locksmiths. Their intention is for staff to turn up each morning, and their working hours will be dependent on the amount of work available. If there is 4 hours’ worth of work, they will work for that time, then be furloughed the rest of the day. On the flip side, if there is a full days’ worth of work, they will work for a full day’s pay. This is a perfect example of how you may be able to flex your wage cost during the next few months to the amount of work available.
In order to claim furlough from July onwards it is worth noting that the minimum number of claim days is 7, so good record keeping will be imperative to back up any claim made.
Key questions before you bring staff back
During this period you will need to consider at what point you bring back the team in full. You may need to consider whether there is even going to be sufficient work to keep the whole team, or whether any redundancies are going to be likely. As the furlough scheme starts to be withdrawn from 1 August 2020, the furloughed staff will be costing the business money, so serious consideration will need to be had about the likely of these staff returning.
Key questions you need to be asking yourself are:
- What’s going on in your sector and how is the market looking?
- What work is coming in over the next few months, and does the pipeline look positive?
- What revenue will you make from any predicted work?
- Do you currently have enough cashflow? And if there are cashflow issues, how bad are they looking at present?
- Will your customers pay you on time, and when can you expect the cash to arrive?
Getting a handle on your financials will be imperative over the next few months, as without these you will be unable to make important business decisions for the right reasons. If it is already clear in the middle of July that business is not going to pick up sufficiently to avoid redundancies, then by making a quick and decisive decision in July rather than October, this could be the difference between your business surviving, and the business failing and your whole team losing their jobs in the process.
Making sure your business is ready to re-open
Once you’ve decided that there is enough potential work and income to justify bringing people back from furlough, you’ve got to get the business ready for this change.
Most companies’ cash will have dwindled over the past three months, so you might need to look at the Coronavirus Business Interruption Loan (CBIL) or the Bounce Back Loan Scheme (BBLS) to get some additional cash into the coffers, and to put the right safety and social-distancing procedures in place.
Our Hornchurch office is nearly ready to reopen for staff who wish to return to the office following the shutdown, and we’ve put measures in place to ensure everyone remains safe and well.
- Hand-sanitising gel on desks, so we’re habitually cleaning our hands
- Posters around the buildings
- Spacing of desks and social distancing in the building
- A maximum number of people in the office at any one time.
- Reception guard for safety of guests and reception staff
Remote working has come into its own during the pandemic and has built some great habits for staff who wouldn’t normally work remotely. The future is about splitting up office time and home-working time, so you can keep the optimum amount of people at work, and the rest working from home.
Coping with the changes to the furlough scheme
Employees are currently being paid 80% of their existing salary, of which the company is able to reclaim this amount in full. From 1 August 2020, the Government’s contributions will gradually step down. In August the company will be responsible for the employer’s national insurance (NI) and pension contributions. From September the business will have to cover 10% of the wage costs of furloughed workers (plus NI & pension contributions). In October this increases to 20% (plus NI & pension contributions). This will all start to eat into your cashflow and profit compared to the previous months.
By the end of July at the latest, you’ll need to make some big considerations around cashflow, staffing and (potentially) redundancies. Redundancy payments will be a big hit on your cash reserves. So you need to make that decision at the right time, looking at how long staff have been with you and what they will be due if a redundancy payout is needed. Waiting until October rather than July could financially cost of the business more money depending on what the current situation with that member of staff looks like.
There will be tough decisions to make, and there will be horrible conversations to be had, but it could be a necessity if you want to get your business through the next few months.
Preparing the business financially
There are going to be real financial pressures for businesses that DO bring staff back, especially given the reduction in furlough contributions from the Government.
To be to deal with the financial implications of coming back from furlough, you need to look at:
- Assessing the level of work coming in – review your pipeline weekly and make a realistic assessment of the work coming in and what this income adds to your revenue.
- Reviewing workflow – look at the workflow for the week, or the month, and decide how many members of staff you need on hand to provide a workable service. Assess the cost impact of utilising and paying these employees.
- Set clear budgets – for each project or job, set a clear budget based on the staff required, the job overheads, the payroll costs and your desired margin.
- Being effective with resourcing – think about which staff will be working, and who will be needed for each project or shift. If you need two operational people and one admin person, make sure they’re available, work well together and can operate in a ‘bubble’ for the period of the job.
- Choose the right work – think about the type of work you can do, which revenue streams provide the best margins, and how best to use your existing staff, resources and time to be efficient, productive and (crucially) profitable.
- Stick to your timelines– if you’ve budgeted for 3 people across 5 days on a project, stick to that and make sure you meet your deadlines and don’t have any overruns.
In terms of financials, it’s all much easier with access to a good financial system.
If you have opportunities and income logged, you should be able to base things like cash and budgets on these numbers. And once you get to ‘month one’ you can then back look at how well you estimated things, and where changes are needed for next month.
It’s an ongoing process and you need to be constantly reviewing those numbers.
Working with you plan your financial strategy
We’re working closely with our owner manager clients to prepare their businesses for a return to work and review the financial implications of changes to the furlough scheme.
We’ll help you put together up-to-date accounts and management information, looking at areas like cashflow, your pipeline and what revenue you can expect. And we’re there as a sounding board to sense check your plans and whether the numbers stack up.
The key is to plan NOW and update your plan on a weekly basis, at least. We’ll be there to review the business, look at customer enquiry levels and potential income and help you make those hard decisions.
Don’t just make money: look at cutting your costs, optimising your staffing and doing the best thing for your business – securing the future of your staff and talent.