News archive
29/05/2008
Keeping hold of the reins in times of trouble
As the credit crunch continues to make its presence felt and "stagflation" takes hold of the UK economy, SMEs face a challenging trading period. With profit margins getting squeezed and sales harder to secure, how can business owners and directors make sure they stay afloat?
Stephen Fern, Director at LC Corporate Strategies, the business turnaround specialist, looks at how proactively managing cashflow, including VAT and PAYE arrears, can help to ease the pressure to allow management the time to seek the opportunities that will safeguard the business' future success.
These are challenging times for SMEs. Falling property values, rising fuel and raw material costs and a consumer market still feeling the effects of the credit crunch and persistent inflation are all contributing to one of the most difficult trading times over the past decade.
So what sets apart those businesses that will ride the storm and go onto achieve greater success? Despite the doom and gloom, a well managed business with a quality product or service to sell can succeed. However, when macroeconomic pressures threaten the performance and sustainability of a business, it is crucial owner managers are on the look out for the warning signs of a business in trouble. These could include:
Gaps in financial information and slipping budgetary controls
- A significant drop in working capital
- A lack of cost controls
- Increasing overdraft
- Deferred or delayed Crown payments
- Unhealthy dependence on a small number of customers or suppliers
- Production disruptions or delays
- Poor staff retention
- Loss of key customers
- Disputes among directors and senior managers
- Deteriorating relationship with funders
At different times most businesses will experience one or other of these factors. But a combination of two or more over a sustained period is usually a signal that something is going wrong. Owner managers when confronted with these challenges can spread themselves too thinly, ‘fire fighting' in a bid to resolve the company's current predicament. This can result in unresolved issues escalating and cause the stakeholders of the business, including banks and other funders, to become uncertain about their position.
Difficult though it may be, managers must try and take a step back from the cold face. There are immediate actions that can be taken to alleviate some of the pressure. Firstly, cash flow controls need to be tightened and if an arrangement with a funder exists, be it a bank or an asset-based lender, it is far better to confront financial performance issues rather than wait until you are unable to pay them. It is also wise to solicit the expertise of a turnaround professional. This is often less daunting than approaching a funding partner for advice, and they will be able to go through the options available to the business.
Each business is different, but options could include; negotiating a new funding package, installing an interim turnaround manager, providing managerial support to the company's existing finance function, compiling financial documents on the company's behalf or even rescheduling mounting VAT or PAYE payments. We have many years experience working with the Crown to help troubled businesses restructure VAT and PAYE payments through a time-to-pay arrangement. By ringfencing this Crown debt, it gives managers of otherwise viable businesses some breathing space.
The aim of a turnaround strategy is to free business owners to concentrate on the bigger picture. Often companies fail because they hit a stumbling block, which results in managers spending all of their time liaising with disgruntled creditors and funders. Once a turnaround programme is implemented, the owner's focus is entirely on the future growth and success of the business.
03/04/2008
Current climate will worsen late payment problem
The current climate means more owner managers are having to deal with late payers, and how to manage the situation when they find themselves unable to pay creditors, according to Paul Reeves, director at rescue and recovery firm Leonard Curtis.
He says: “During an economic downturn late payment undoubtedly becomes more prevalent. It is a vicious circle, your customers fail to pay you on time, you in turn delay paying your suppliers. The key in both instances is to deal with the problem head on.”
Though there are legal routes available to small business owners, Reeves advises owner managers to think carefully before involving lawyers. “When confronted with severe late payers, it’s crucial the owner manager takes a long-term, commercial view when considering their options. If the “hit them with a big stick” route is taken, there is always the possibility that the relationship will be ruined, and worse, there is an extremely good chance the customer in question cannot pay for some genuine reason.
“If a business takes a customer unable to pay down the legal road, there’s a strong possibility that customer will end up in an insolvency process. The business will incur legal costs, and as an unsecured creditor of the customer, it would have little hope of recovering any of the monies owed. If the relationship allows, a better approach is to broker an unofficial payment arrangement.”
An unofficial late payment arrangement is essentially an informal Company Voluntary Arrangement (CVA), whereby both parties agree a time-to-pay deal. According to Reeves these are becoming more popular as when compared to more confrontational methods, they significantly increase the chances of the business actually being paid and safeguard the relationship should it be intrinsic to the long-term success of the company.
When a business owner finds themselves struggling to pay its creditors, Reeves recommends careful analysis of payment priorities.
“Managers need to make a commercial decision as to which of its creditors it must pay to stay afloat. For instance, it will have to pay its landlord, salaries and key suppliers. In these circumstances Crown arrears can also mount up. However, if the business enlists a recovery advisor, it is possible to agree a time-to-pay arrangement with HM Revenue & Customs (HMRC), provided it can be proved the company is a viable concern.
“In reality, it is in everyone’s best interests if the company is kept out of administration, as the best chance of creditors being paid is secured if the business continues to trade.”
In today’s economy this type of situation will become more common, and businesses must take a practical approach to both owing and being owed money. Reeves’ suggests owner managers select suppliers and customers wisely, choosing those companies where there is an established relationship of trust. He concludes: “If you do run in to trouble, make sure you maintain good communications with the customer or supplier. The worst thing to do is to stop taking calls or to start making promises you know you can’t keep. Tackle it head on in a diplomatic and honest way and you’ll more than likely reach an arrangement that works for everybody.”
01/02/2008
The need to succeed
Directors of struggling businesses may face tough automatic penalties following the implementation of the UK's largest ever single piece of legislation.
The 2006 Companies Act could result in the directors of any company that becomes insolvent being punished for failing to promote 'success'.
"The Act is largely intended to consolidate existing legislation, but there are also significant new provisions, notably the duty of each director to promote the success of the company for the benefit of its shareholders," explained Paul Masters, a director at corporate recovery firm DTE Leonard Curtis.
To do this directors must take into account the company's staff, customers and suppliers, as well as the environment and the local community. However, Paul Masters is particularly concerned about the meaning of 'success' which is not defined in the Act and can clearly mean different things to different people. How this is to be enforced is not entirely clear.
"As an example, a company may face a difficult decision designed to enhance long-term prosperity, but at the cost of short-term profitability, such as a major capital investment, but which could result in loss of employment" commented Paul Masters.
"Some shareholders will be delighted with the long term view, even if their share price falls in the short term. Other shareholders would want to see short term profits maximised. The employees and possibly unions are very unlikely to be happy if the investment proceeds, but how can the directors satisfy all types of stakeholder?
"This is a difficult balance, but one which the directors must strive to achieve. More importantly, they need to demonstrate that they have considered these and many other implications of their decision."
Some well-managed companies may already have procedures in place that ensure that the long and short term perspectives of decisions are considered as well as the possible implications on all stakeholders and the environment.
"If these companies fell on hard times, the directors may need to demonstrate that they had considered the effects of their decisions by producing board minutes, feasibility studies or that they have sought external advice. Many SMEs, however, are unlikely to have such rigorous procedures in place," explained Paul Masters.
Entering insolvency is an obvious indication that the company has not succeeded and this presents a raft of potential problems for directors of struggling businesses.
"When a company enters some type of insolvency proceedings, could it be inferred that the directors have automatically breached their duty to promote the company's success? This is, perhaps, the greatest uncertainty for directors, but the consequences of this for them could be severe," said Paul Masters.
An insolvency practitioner (IP) must report to the Department for Business, Enterprise and Regulatory Reform ("BERR" - formerly the DTI) on the conduct of the directors. It could become common practice for IPs to note this breach of duty in their conduct reports, which could result in the director being disqualified from being involved in company management for a number of years.
Paul Masters is advising company directors to ensure that all key decisions they make are properly documented, and to seek professional advice as soon as they become aware that their company is facing financial difficulty. The potential consequences for failing to take this advice at an appropriate time could about to become more severe," says Paul Masters.
28/01/2008
Grey clouds, sliver linings
Choppy financial waters are forecast for 2008. Yet, as Paul Reeves explains, business that keep firm hand on the helm can chart a safe and prosperous passage
While there is much to be said for positive thinking, there are times when “telling it like it is” represents the only sensible option – and the economic outlook for 2008 is no exception.
Experts from a broad spectrum of commercial activity agree that this year is likely to present some tough financial challenges for businesses. Nonetheless, there is room for both optimism and opportunity.
Interest rates are certainly an issue that forward-looking companies will need to factor into their plans. The quarter per cent reduction in December, following six rate increases will not in itself make a great deal of difference to the financial climate.
All the same, it does suggest that rates have at least peaked and we may well see further small cuts in the new year, with the smart money on two more quarter per cent reductions before the summer.
So what does this mean for businesses on the ground, battling to maintain healthy levels of cashflow?
Despite the quarter per cent reduction, interest rates still make the repayment of business loans and the servicing of debts a challenge because they are charged at a premium over base rates. Typically, this means businesses are paying around eight per cent, and often more, which will inevitably take its toll on financial resources. The small reduction helps, but there is still considerable pressure on balances.
Another area of concern is commercial property, with valuations subject to intense scrutiny. The upshot is likely to be that business directors will find it increasingly difficult to locate funders willing to lend against some types of property.
The much publicised “credit crunch” is also have an impact on commercial finance. Lenders rely on cash and this is becoming increasingly tight as banks become reluctant to lend each other money. The Libor rate is now very high, and this does nothing to help matters.
Despite these concerning conditions, cashflow finance is still readily available and service charges are very competitive. Just as encouragingly, there is no sign of this situation altering, and factoring companies continue to report strong growth.
Most asset based lenders (ABLs) buy money off banks and lend it at a margin. The ABL market is expected to remain strong, with the possible exception of transactions in which property has been pledged as supporting collateral.
It is estimated that more than 45,000 companies currently use ABL facilities and recent figures suggest that ABL accounts for some £14bn of UK lending, compared with only £3bn 10 years ago.
The appeal of this type of commercial finance is straightforward: using assets to structure funding means management can keep a high proportion of the equity and keep a tight rein as the company moves forward.
Because a large proportion of an ABL funding package is of a revolving nature, businesses can be geared up safely without burdensome debt repayments exerting pressure on cashflow. Transactions can also be completed quickly and cost effectively.
All the same, companies should caution against financing their assets up to the hilt and ABL must be used in a sensible and sustainable manner.
For businesses that get into difficulty, there are still plenty of options, even in economically turbulent times.
A range of turnaround options, combined with a more enlightened approach from creditors mean that struggling companies can stay afloat, provided the underlying business fundamentals remain viable.
Measures available from turnaround specialists include business performance enhancement, business reviews, operational adjustments, financial restructuring, rescheduling of tax arrears, and interim management. There are even occasions where a business’ difficulties turn out to be the catalyst for change that sets it on the road to previously unimagined success.
It would be foolish to pretend that 2008 will be a breeze for most businesses. Yet, with the correct strategies and sound professional advice, there is every reason to believe that a period of promise and prosperity is on the horizon.
Ends
Press Contact: Kate Macnamara / 0161 876 5522 / 07788 572271 / kate.macnamara@gyrointernational.com