Business Money corporate recovery article

16th July 2008

Gary Bell, business recovery partner at Cowgill Holloway Business Recovery LLP

One of the biggest mistakes that a struggling business can make is ignoring financial problems until it’s too late. Communication with both customers and suppliers is key, as is working with banks and advisers. Equally important is keeping management accounts and cash flow forecasts updated These factors will give a troubled organisation the best chance of nipping issues in the bud before they cause any real damage to the company.

In relation to credit control, a senior member of the management team should be responsible for setting both realistic and sensible credit limits/periods. Further, customers should be made aware of the credit policy and the company should ensure it is adhered to, making customers aware of the penalties for non-compliance.

Invoices should be raised no more than 72 hours from the date of transaction and businesses should ensure that systems are in place so that, if a payment becomes overdue, debtors are contacted without delay. Companies should also consider allowing payments in instalments, which will help maintain a steady cash flow, as well as easing the burden on the late-paying client.

If a business in financial difficulty is making a late payment, it is imperative to let the relevant people know immediately. It is also important that regular dialogue is maintained with customers/suppliers.

If a business has large sums of monies due on a regular basis, then invoice finance may be a good option, particularly given current funding difficulties, as banks are becoming more cautious about who they lend to and at what level. This can give the company’s cash flow a significant boost and allow it to invest in essential upgrades or systems, as well as getting day-to-day business moving again.

Beyond minimising late payment issues, there are a number of obvious measures a business can consider to save money and improve efficiency. For example, in order to keep stock levels at a minimum cost, purchases should be well planned so that only necessary items are being bought. Ensuring quality control procedures are in place will also benefit businesses.

Where appropriate, however, consideration should be given to bulk purchasing and taking advantage of discounts. Since these are all things that people do instinctively as they shop for personal items, business buying should be no different.

If a company is struggling, it’s important that directors are realistic. Company owners, or somebody ultimately responsible for its success or failure, need to be prepared to make sacrifices in terms of both time and money to create a sustainable business model – it will pay off in the future.

If a company owes money and is finding it difficult to pay suppliers, it is essential that it opens up conversation with creditors, as they may agree to an overall discount on the bill if it is settled immediately. Many will be willing to negotiate to get the money they are owed – they, after all, may be in a similar situation, where every penny moving through the business can have a very real impact on its current and future position.

Sometimes, of course, prevention may be impossible, whether because a company has left it too late or because matters have spiralled out of control too quickly. However, an organisation may be able to find a cure if they turn to professional advisers who specialise in corporate recovery for help when the financial strain becomes too much to handle. Corporate recovery professionals can look at the financial status of the business and determine whether it is really heading for insolvency, or if matters can, in fact, be reconciled.

One option available to companies in this situation is a Company Voluntary Arrangement (CVA). A CVA is a formal procedure under which companies experiencing cash flow difficulties can continue to trade with the intention of improving their financial situation with creditors. In addition to easing cash flow, it stops court action and winding up procedures, and, directors remain in control of the business.

CVAs, however, can last up to five years and do not always allow for flexibility. For example, if, during the post CVA period, a company encounters more financial difficulties before the fixed period is up, it may find itself in a position where it is unable to pay the agreed instalments, in which case a CVA would normally end in failure. In addition, new creditors could still instigate insolvency proceedings against the company for debts incurred after the CVA has been approved.

Businesses can often be saved from closure as long as the underlying business is reasonably sound. Even if this is the case, the fact that the credit crunch is affecting some funders’ willingness and ability to finance a restructuring or turnaround scenario may mean that the company has no option but to seek the protection of an administration order to allow some breathing space whilst professional advisers decide the best course of action.

  There are advantages and disadvantages to every solution available to companies in difficulty, so it is important that an organisation works closely with its adviser to ensure they are opting for the best possible arrangement for their business and call them in early enough to ensure every option to restructure has been considered.

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Business Money
The credit crunch and corporate insolvencies

Mark Lund, insolvency and corporate recovery partner at turner parkinson LLP

As the economy teeters on the brink of recession, it doesn’t look as if doing business is going to get easier for the foreseeable future. The first quarter of 2008 saw the number of corporate insolvencies reach 3,210 – a rise of 2 per cent on the previous three months and 4 per cent on the same period a year ago. The increase in voluntary liquidations was particularly dramatic, growing 25.4 per cent compared to the first quarter of 2007.

The credit crunch is continuing to cause difficulties, leaving scores of faltering and failing businesses in its wake. The Bank of England’s third successive hold of interest rates at 5 per cent is an attempt to slow down inflation – 3.3 per cent, well above the Government’s target of 2 per cent, at the time of writing – rather than a response to recessionary pressures, and it is likely that enterprise will pay the price.

The banks are continuing to tighten their belts, and the flow of cheap credit that businesses have enjoyed in recent years has pretty much dried up – cautiousness is the order of the day, and the number of SMEs benefiting from funding is, as a result, getting smaller. Not only are rates getting higher, limiting affordability for business loans, but the number of products available is also dwindling – the funding options are shrinking on an almost daily basis.

With the banks limiting their funding lines, many businesses are looking at alternative funding sources. Independent secondary lenders such as factoring companies and assets based lenders are expecting to see a continued upturn in business. Many smaller businesses are also relying increasingly on loans from individuals such as directors or shareholders to bridge the funding gap.

There are a number of industries that are, or are likely to be in the very near future, in severe need of a funding lifeline. With the Consumer Confidence index at 79 – down from 91 a year ago – the outlook doesn’t look good for retail or the leisure sector. While the major players may weather the storm – after all, people still need food and clothing – smaller independents face an uphill struggle against what looks set to be a period of belt tightening.

The property market is already reeling – it is widely believed that it has reached a saturation point, particularly when it comes to city apartments where supply is by far outstripping demand. Buy to let is in
decline and house prices are continuing to fall, with a 2 per cent drop in June leaving them 6.1 per cent lower than a year ago.

Barratt Developments has announced 1,000 job cuts – around 15 per cent of its workforce – while rival developer, Taylor Wimpey, has broken the news that it has been unable to raise the £500 million of funding it needs. Given such major players are feeling the strain, the damage to smaller developers and subcontractors may, for many, be irreparable.

However, it isn’t just in the residential sector that the market is faltering. Uncertainty and the growing lack of confidence in the retail sector, combined with a shift towards shopping online, has meant that flagship developments have largely dried up, and commentators at Deloitte have warned that retail-led urban regeneration may be over for good.

The third industry likely to experience serious difficulties and, as a result, a significant increase in insolvencies, is the marketing sector, which will in turn drive a downturn in printing business. In times of cost cutting, expensive print advertising to boost company profile is low on the list of priorities, and, rightly or wrongly, overall budgets are likely to be cut drastically.

The signs on the client side are ominous – the most recent Bellwether report, which measures the health of the marketing industry on a quarterly basis, showed the largest fall in direct marketing budgets in eight years, with 21 per cent of companies reporting a decrease overall. Events, PR, market research and sales promotion also appear to be suffering, experiencing the steepest cuts since 2006.

So what can businesses do to try and weather the storm? Unfortunately, there are no miracle solutions and most companies will have difficult and unpalatable decisions to make. Businesses must be on top of their financial management, monitoring and reviewing spend on a regular basis, so they can more easily identify areas in which they can make the greatest savings. In the absence of readily available bank funding companies should consider alternative funding but may ultimately need to be ruthless in cutting overheads, and, if necessary, reduce staff numbers to avoid trading losses.

Individuals who are lending monies to companies with funding difficulties should take advice to protect their position. All too often, the heart rules the head and loans are made to the company by individuals involved in the business. This is often done without proper consideration as to the viability of the business or the basis on which funds are provided and, in particular, whether any security can be given. If this is not considered before the monies are advanced, then generally it will be too late.

For some companies, unfortunately, it will be too late to turn the tide and even more drastic measures will be required. In such cases, it is crucial to seek professional guidance as early as possible – burying your head in the sand will do nothing to help your business. If you hold off until it is too late, you will leave your company with little, if any, hope of recovery and limit the options available for saving the business. If the directors have propped up the company with loans from their personal resources then, in a worst case scenario, this can lead to both the company going bust and the directors going bankrupt.

There are a number of options for restructuring and turning around a business if you are prepared to work to save it, and a wealth of advice is available. Experts will be able to recommend the best choices for reorganisation, which may involve looking at alternative funding, reducing overhead or getting rid of non-profitable parts of the business, to improve cash flow and boost your company’s chances of survival.

Technically, we are not in a recession yet – but the indicators suggest that it is likely that we soon will be, and businesses need to be prepared for the hard slog ahead of them. There is no doubt that more will fail before the credit crunch is over, but the damage will be limited if more companies put rigorous financial procedures in place and take the plunge with the business decisions that will make or break them.