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Wed, Jul

Think you’re going under?

David Hudson, partner at Baker Tilly Restructuring and Recovery LLP, throws a lifeline to those of you who fear your business is about to become insolvent with this top tips feature.

Are you heading for insolvency? Going by what we are currently seeing in the market, businesses could be facing a fresh wave of challenges. Business failures are more prevalent when coming out of a recession when access to, and the management of, cash and working capital are key to both survival and financing growth.


Baker Tilly’s analysis of administration appointments taken from The Insolvency Service, reveals that the number of companies in administration was 673 in Q3 2011 (633 in Q3 2010). If you are seeing any of the indicators below that your business may be headed to the insolvency process you need to act fast, so check them out:

  • An unforeseen funding requirement emerges
  • Are you making regular excess requests to funders?
  • Increased volume of calls from creditors chasing on payment. If it is you being slow on payment, could it be they that have a cashflow problem? How will this impact on your business?
  • Reaching the limit on supplier accounts - you find yourself paying cash on delivery for stock.
  • Any legal action being taken by creditors (e.g. a notice or demand letter, distraint)
  • There is a need for the director injection into the working capital
  • Need to sell or refinance core assets to raise working capital

The slow growth in the economy means businesses will continue to have little room for manoeuvre in terms of either profit or overall growth. Therefore, for companies already struggling with cash issues, it is even more vital to tackle any potential issues well in advance. Traditional credit lending continues to be less available and HMRC is demonstrating signs of being more aggressive in its actions with defaulting creditors. On top of that, anecdotal evidence suggests that businesses are finding it more difficult to collect outstanding debts and so are extending the payment terms with their own creditors as far as possible. This, of course, exacerbates the problem, as credit becomes squeezed in all directions. The result is that many businesses are living very much hand to mouth with their cash resources and where they have not been subject to constant chasing, liabilities have not been paid.

Mastering the following aspects of your business can mean the difference between future growth or financial collapse. Below is some advice to businesses aiming to avoid becoming another business failure statistic:



1. Re-assess the skills of your management team
Beyond a certain point, it becomes clear that owner/managers may need help and that a business needs additional skills.
Reviewing and utilising the existing team and adding new skills and capabilities to best advantage requires acceptance of change to introduce a fresh approach, which may be a new concept to a business that has grown from a small team and added staff in an ad hoc manner. However, this is essential to ensure that the business as a whole works as effectively as possible and is able to evolve as the external market itself does.
The management structure will need to be flexible and develop as the business itself grows. For example, it may be necessary to bring in interim managers, such as a financial director, until the role deserves a permanent, dedicated member of staff.


2. Plan for the long term, forecast in the short-medium term
Long-term planning is easier said than done, especially so if, as a business owner/manager, you have been focusing on running the business day-to-day and fire-fighting cash pressures when strategy can often end up being pushed aside. Therefore, it may be time to refocus the business plan to longer term growth rather than survival. Moreover, the plan should be sustainable and revisited regularly, looking further ahead than two or three years whilst desirable, is extremely challenging in a continually uncertain economic climate.

3. Make sure your forecasting is robust
Budgets can often be vague and focus solely on driving top line turnover, perhaps based on the hope factor rather than a realistic current financial position and desired progress of the business. Consequently, timely and regular re-forecasting using performance benchmarks can enable you to maintain a strong grip on how the business is performing and this will enable you to demonstrate your financial control to key stakeholders.
Forecasting should also focus on the cost structure of the business, both variable costs and the impact on gross margin, and overhead costs and the impact on bottom line. A profit improvement plan is an essential part of any business strategy, but one that is often overlooked. Financial forecasting is vitally important. However, much management information produced is historically focussed rather than forward looking.

4. Ensure your approach is flexible
To constantly reassess and recalibrate any business requires flexibility on the part of management. This requires a clear focus on ultimate objectives. The goal for many business owners, if not to prepare for the next generation, is often to sell the business eventually or at least realise capital.
Similarly, ’what if?’ questions need to be considered for the same reasons. Having contingency and scenario plans in place can help reduce the impact of future unknowns and having insurance in place can offer protection against future potential financial loss.

5. Finance for the future
Strong, well-managed businesses that can regularly demonstrate management control and a sound business plan have always been able to raise finance. This remains the case in the current, post-crisis financial environment. Therefore proving that a business can service any additional funding it takes on is top of the agenda for banks. Banks in particular are more focused than ever on pricing funding applications brought to them in accordance with perceived risk. The results of the current banking review, as well as anticipated interest rate rises and the impact of inflation, will only compound funders’ emphasis on quality business management, plans and controls when it comes to approving credit applications.

6. Smarten up the back-office
Both finance and IT are key back-office functions that all businesses need to constantly assess. But are they delivering real value-for-money to your organisation?
Many businesses continue with legacy IT infrastructures which are no longer fit for purpose. Improved systems and processes often lead to greater efficiencies which can lower a business’s cost base and hence increase profitability. But often the greatest benefit derives from the enhanced management information that improved systems can provide, enabling management decisions to be more informed and enlightened.

7. Communicate honestly with your financial stakeholders
How long can you maintain ‘business as usual’ when you lose a key customer? Ensure you know where your breakeven position is and what actions are necessary in a worst-case scenario. Keep stakeholders informed of your actions and timescales required to mitigate your ongoing funding requirement. If you have insurance, do everything to maximise possible recoveries from your insurers.

8. Tackle external market challenges head on
It is important to question what competitors are doing. It may be time to stand back and reassess the unique selling points (USPs) of your business and also to research and understand both new and existing markets.

9. Be tough ON yourself and WITH?others
As stakeholders and HMRC are now less lenient on businesses, so should you be with your own customers. You know what you should do, but do you do it? Do not continue to supply without regular payment from clients.
Can your suppliers help you? Talk to your other stakeholders. Renegotiate any existing agreements in your favour.

10. Protect yourself
In tough trading conditions, it is vital to take time to contingency plan for all potential outcomes. If on doing this, you fear the worst as the financial problems of your business have escalated, take an honest approach to identifying areas of underperformance and be prepared to tackle them head on with professional support. Recovery experts or your lawyer can help you in taking immediate and decisive action - before it is too late. In such a scenario, be prepared to gather together all the facts to present as accurate a financial picture of your business as possible. The earlier you act, the better the chance of making a recovery or in the worst cases, avoiding extinction.

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