Zombie Firms: The Undead Companies That Threaten Our Economy

In the wake of the COVID-19 pandemic, many businesses have struggled to stay afloat. However, some companies' struggles have been going on longer than the pandemic. These companies may still be operating, but they are essentially "dead" in terms of their ability to contribute to the economy, so here’s where the nickname “zombie” is coming from.

Deloitte (2018) found that 16% of firms could be considered zombies. Grieder and Ortega (2020) find that, between 1980 and 2018, the proportion of zombies rose from around 3% to around 25%. They show that two-thirds of Canadian zombies were in industries exposed to commodity prices, which implies that Canada may be a poor performer in terms of its number of zombies, with the highest zombie share when compared with other advanced economies.?

The problem with zombie firms is that they take up valuable resources, such as labor and capital, that could be better used by more productive companies. Additionally, zombie firms can prevent new businesses from entering the market, as they can undercut prices and maintain their market share despite their lack of profitability.?

So, what are the strategies to avoiding the unenviable fate of becoming one of the zombies of the market??

1. Focus on Cash Flow

Cash flow is the lifeblood of any business. Without a steady stream of cash, your business won't be able to survive in the long run. To avoid becoming a zombie firm, it's essential to focus on maintaining a healthy cash flow. This means monitoring your accounts receivable and accounts payable and taking steps to ensure that you are collecting payments from customers promptly.

2. Invest in Growth

While it may be tempting to focus on short-term profits, it's important to invest in growth if you want your business to succeed in the long run. This means taking calculated risks and investing in new products, services, or markets that have the potential to generate long-term growth and profitability.

3. Maintain a Healthy Balance Sheet

Your company's balance sheet is a reflection of its financial health. To avoid becoming a zombie firm, it's essential to maintain a healthy balance sheet. This means keeping your debt levels under control and ensuring that you have adequate cash reserves to weather any downturns.

4. Stay Agile

The business world is constantly changing, and companies that are unable to adapt to these changes are at risk of becoming zombie firms. To avoid this fate, it's essential to stay agile and be willing to pivot your business strategy as needed. This may mean shifting your focus to new markets, investing in new technologies, or adopting new business models.

5. Build Strong Relationships

Building strong relationships with your customers, suppliers, and other stakeholders is essential for long-term success. By nurturing these relationships, you can build a loyal customer base and secure the support of key suppliers and partners.

In conclusion, becoming a zombie firm is a real risk for companies that are struggling to generate enough revenue to cover their debt servicing costs. However, by focusing on cash flow, investing in growth, maintaining a healthy balance sheet, staying agile, and building strong relationships, you can avoid this fate and achieve long-term success. Taking these steps will help your company to build a resilient and sustainable business that is well-positioned to thrive in the years to come.

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