Cash flow pressures as a result of Covid – restructuring could be an option

Many businesses experienced significant challenges during the national lockdown and ongoing regional lockdowns.

Alan Coleman, Cowgills Partner and Licensed Insolvency Practitioner has helped many businesses during these challenging times whether it has been avoiding insolvency or advising Directors about available restructuring options.

Here, Alan outlines some considerations for Directors who are considering a business restructuring.

Business Projections and Cash Flow forecasts

It is probably more important than ever to have realistic business projections and cash flow forecasts.  We appreciate that forecasting is difficult for some businesses in “normal” times let alone producing projections in these uncertain times.  However, these forecasts are critical for any business for Directors to:

• Gauge how the business is performing when comparing actuals to forecasts
• Understand the breakeven point of the business. This may be on a contract by contract basis or what the business needs to achieve week by week in terms of turnover to ensure that the business is not loss making
• Have an understanding of what future cash requirements of the business may be so that the Directors can plan for these events rather than panicking should the business run out of cash with insufficient time to raise the much needed working capital
• Directors must ensure that they are not trading recklessly, in other words trading whilst insolvent without a plan.Should the business end up in an insolvency procedure, the Directors may become personally liable for claims such as wrongful trading.
• Remember to regularly update projections if they are materially wrong, for example if you win or lose a major contract making the historic projections useless

Do not overlook the importance of Board meetings and minutes

We cannot emphasise enough the importance of regular Board meetings and the recording of these meetings.

Well run businesses should have regular Board meetings to review recent management accounts against their projections and investigate any variances.  It is an opportunity for the Board to record major decisions and why that decision was made.

The Board meeting minutes will act as evidence that, in taking a particular decision, the directors considered their duties.

These Board meetings and minutes might become even more important if the business is facing cash flow difficulties.  The minutes will record what actions the Board has taken or intends to take (for example taking professional advice from a Licensed Insolvency Practitioner) and why they have continued to trade.

We act for many companies where the Board wants the comfort that the decisions that they are taking when facing cash flow difficulties are in the best interests of all involved – the company, creditors, employees and shareholders.

Taking advice from a Licensed Insolvency Practitioner and recording such advice at Board meetings reduces the risks on the Directors personally if they are subsequently challenged by a Liquidator or Administrator if the company subsequently fails.

Restructuring the company

Restructuring a business always tends to come with some tough decisions for the Board or at least some awkward discussions with key stakeholders. We find that Directors approach us for assistance with a business restructuring for key reasons:

1. Our expertise in restructuring businesses successfully without eye watering fees
2. Our ability to overview the whole business without blinkers
3. We are independent – it takes away the emotion when key decisions need to be made

Key areas of a restructuring

It is important that when considering a restructuring that the whole business is reviewed to enable a full restructuring plan to be formulated.  One of the main pitfalls we experience when directors try their own restructuring is that they effectively put a sticking plaster on the problem by only dealing with easy fixes or easy decisions or discussions and the problem soon returns.

Some of the key areas that we review to enable a full plan to be formulated include:

Assets

• Redundant assets can be sold
• Assets of value that could be used to raise finance – our brokers have access to a wide range of lenders
• Stock – can we reduce the level of stock being held, and stock finance might be an option
• Trade debtors – could a small discount be offered to encourage debtors to pay early to assist cash flow?
• Business Interruption Insurances – consider if a claim can be made and what professional advice is needed to maximise the chances or quantum of a recovery

Creditors

• HMRC – can we look to arrange a Time to Pay Agreement (TTP)?In our experience using professional advisors to present a proposal to HMRC generally improves the chances of getting the right TTP.  We often see Directors agreeing to TTP with HMRC that are not affordable and could cause the company to fail in the future.
• Trade Creditors – consider reversing the tables and going to creditors to agree payment terms going to can assist with future cash flow requirements
• Landlords – negotiating leases in terms of any arrears and the rents going forward

Employees

• Do you need the whole workforce for the current and/or projected turnover levels
• How can you fund redundancies?We can assist with accessing government loans for redundancy costs
• Negotiation might be needed for temporary changes to the workforce wages/salaries/terms while going through tough times to avoid redundancies or future redundancies.

External Lenders

• Agreeing revised terms with a lender
• Consider replacing the current lender with a new lender for either improved terms/cost and or additional borrowings

Shareholders

• Negotiate with Shareholders to invest
• Consider new investors to either replace current Shareholders

If you are concerned about your current situation and would like an initial chat free of charge, then please do not hesitate to contact Alan directly alan.coleman@cowgills.co.uk