News archive
29/10/2008
Risk management focus
With the banking sector reeling from an apparent lack of risk management, the financial risk management strategies of manufacturers are also being put to the test. With high energy costs, a slowing economy and a general lack of available credit, how many businesses are sufficiently prepared to trade through if cash flow pressures start to bite?
Stephen Fern, director at LC Corporate Strategies, looks at the options available to manufacturers when trouble hits; from ring-fencing VAT and PAYE arrears, to realising the value in the balance sheet, what steps should managers be taking to secure the business for the future?
Risk management is about identifying the threats to a company's profitability or survival and planning a strategy that will minimise or eliminate their effects. Risk management has many connotations and applications. We are currently experiencing the aftermath of a lack of risk management in the financial sector, and are likely to continue feeling the impact of the resultant banking crisis into 2010.
Clearly risk management concerning health and safety and data security remain top of the agenda for manufacturers regardless of the state of the economy. Financial risk management however is all too easy to push aside when times are good. Consumers that leveraged themselves to their full extent to buy property at the market's peak are now finding themselves in a precarious position as energy prices and the cost of borrowing have increased, while property values have tumbled. In the same way, some businesses took greater risks to facilitate ambitious growth plans during the boom, and are now struggling with additional premises, equipment and labour costs as we move into a tougher trading period.
The recent economic prosperity in the UK has largely been fuelled by easily available credit. Credit has significantly dried up, and in the majority of cases, the absence of consumers with healthy savings accounts and businesses with a good supply of working capital is having a negative effect on spending in the wider economy.
Economic data pouring into the media on the state of the manufacturing sector in the UK emphasizes a bleak future in the short term. What can managers of businesses in this sector do now to ensure they are best placed to secure the future of the company and its employees and what actions should be taken in the future to better manage cash flow risks?
Firstly, there are a number of warning signs that can be indicative of more serious underlying issues within a business when combined with macroeconomic pressures which can jeopardise a company's stability. These are:
- Gaps in financial information and slipping budgetary controls
- A significant drop in working capital
- A lack of cost controls
- Increasing overdraft & finance charges
- Deferred or delayed VAT and PAYE payments
- Unhealthy dependence on a small number of customers or suppliers
- Production disruptions or delays
- Poor staff retention
- Loss of key customers and increasing aged debt
- Disputes among directors and senior managers
- Deteriorating relationship with funders
At different times most businesses will experience one of these factors. But a combination of these factors over a sustained period is a signal that the business has underlying issues. 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 managements' key skills not being maximised.
Difficult though it may be, managers must try and take a step back and view the issues affecting the business from an operational point of view. . There are immediate actions that can be taken to alleviate some of the pressure. Firstly, cash flow controls need to be tightened. Analyse the company's cost base and identify areas where the business can rationalise expenditure. This could involve renegotiating rent payments with the landlord or agreeing extended payment terms with suppliers. Unfortunately it may also include cutting human capital. If plants must be closed and redundancies made, hard though it is, these decisions must be made quickly to safeguard the future of the business.
Secondly, don't ignore your funder, whether bank or asset based lender. It is far better to confront financial performance issues rather than wait until you are unable to pay them. However, a word of caution - be prepared. The banking crisis has made lenders more risk aware, and lending criterion has become far more stringent and in many cases more costly. Make sure accounts are up to date, that there is a robust forecast available and evidence of a strong management team. There are still financial institutions willing to lend, and asset based finance in particular is a cost effective way for manufacturers to make the balance sheet work for the business. It is also more popular than providing pure credit at the moment, as funders prefer to lend according to the assets of a company rather than extending cash overdrafts or loans.
The next step is to analyse the business' core operations;
- Is there a healthy pipeline of new customers?
- Is there long-term demand for a particular product?
- Are we focusing on higher margin work?
- Can improvements be made to manufacturing processes?
Strategically assessing the business will identify its weak points, be they process or people driven, and enable you to determine the best path forward for the company. Where gaps in performance or skills are found, consider getting outside help. Bodies such as the Manufacturing Advisory Service (MAS) are able to advise on manufacturing best practice, from the latest technologies to six-sigma. If a skill gap exists it may be beneficial to employe the services of an interim manager. We maintain a database of interim managers with a broad range of skills. This can be particularly useful if the prospect of preparing financial information and business plans now necessary to successfully apply for funding seems daunting. Many accounting firms also provide quasi FD services with preparation and analysis of management accounts at a cost far less than that of appointing a full time employee in such a capacity.
Other options for the business include working with Her Majesty's Revenue & Customs (HMRC) to renegotiate VAT and PAYE arrears on behalf of companies. Where a business can demonstrate long-term viability and provide robust financial information, it is possible to ring-fence any Crown debt and agree a time-to-pay arrangement with HMRC. This immediately frees up cash flow and gives managers some much needed breathing space.
It's also important not to get too disenchanted with the current economic climate. As I write the value of the pound is falling, but for exporters that can only be a good thing. A recession can force some tough, but necessary, decisions. Whilst the economy is growing and times are good it can be easy for companies to overlook inefficient practices and ignore underperforming staff. When times are hard, this cannot be ignored and must be addressed. Addressing such issues is a positive move and will leave companies leaner and stronger to negotiate the current economic downturn. There is every chance for a strong, well capitalised business to increase their market share during a downturn, whether through opportunistic acquisition or an improved offering. With the right advice, it is very possible to turnaround a struggling company's fortunes.
Many managers and directors are beginning to feel the effects of a recession. If a business is not prepared today, it does not mean steps cannot be taken to prepare it for tomorrow. If you find yourself with some of the warning signs discussed earlier or require general advice, do not delay. The earlier help is sought, the more chance there is a solution can be found.
03/10/2008
A way out for struggling owners managers
Opportunistic entrepreneurs looking to expand through acquisition are proving to be the light at the end of the tunnel for many struggling owner managers, according to Stephen Fern, director at LC Corporate Strategies, the turnaround arm of national top 5 recovery outfit Leonard Curtis.
He said: "Businesses with healthy working capital are acquiring troubled competitors at lower market values. Similar to Lloyds TSB being in a position to soak up one of its largest competitors, in the small and mid-market we are seeing the same trend as some companies feel the pinch of the economy more than others."
The firm currently has a database of would-be acquirers with circa £10m to invest in otherwise viable businesses, which are experiencing cashflow pressures due to soaring energy and raw material costs coupled with a reduction in available credit. It has named the initiative Acquire, to market the business match-making service to owner managers and directors of struggling small and mid-sized enterprises (SMEs) across a range of sectors, including manufacturing, recruitment, haulage and retail.
Fern continues: "A key option for turnaround is to sell the business to a trade buyer. Even if a turnaround proves impossible, once a company goes into administration, we are always keen to identify a buyer to allow the business to trade on under a different guise. In this way, we are often able to safeguard jobs and creditors are more likely to be satisfied.
"For many owner managers, business is becoming an uphill struggle. Whether they are looking to retire or are ready to become a part of a larger operation and benefit from:
- Exit route from the business
- Added management knowledge and experience
- Cost savings and synergies
- Securing customer base or supply chain
- Additional funding and working capital investment
- Consolidation of primary functions and activities
- Operational improvement and efficiencies
We have a ready supply of acquisitive entrepreneurs."
Those interested in registering their interest to be matched with a potential purchaser, should visit http://www.corporatestrategiesplc.com/acquire
01/10/2008
Owner managers head online for confidential advice
Leonard Curtis, the top 5 corporate recovery firm, has launched an online business agony aunt, Elsie, to give a human face to the hundreds of requests for turnaround and insolvency advice it is receiving each month. The service, called Ask LC, is supported by a panel of senior turnaround and recovery experts at Leonard Curtis, specialising in advising small and mid-sized enterprises (SMEs).
The SME community has been one of the hardest hit following the credit crunch - in particular businesses in some areas of manufacturing, retail and haulage; suffering from a combination of a slowing economy and soaring energy prices. Though owner managers are advised to seek advice at the first signs of trouble, many are spending their time fire fighting in an effort to keep the business afloat, according to director at Leonard Curtis, Andrew Bayley. He says: "It's very difficult for owner managers, already under pressure, to find the time to go and talk to someone about the challenges the company is facing. Confidentiality is also frequently an issue, no director wants to advertise the fact that the business is in trouble to employees or funders.
"For these reasons, we found our online enquiries going through the roof. Typically requests for advice were coming in very early in the morning or last thing at night, which are usually the only times a director will have any head space to think about the bigger picture."
To make the service more approachable and to raise awareness, the firm launched Ask LC, fronted by Elsie, a caricature of a helpful, friendly assistant. Users can confidentially submit enquiries, which are answered via email by an expert at Leonard Curtis within 24 hours. The user will not receive any follow-up communication from Leonard Curtis unless specifically requested.
Bayley concludes: "A big turn-off for people when using online enquiries is the thought that they're going to get a follow-up phone call. We allow the user to decide if they would like any contact over and above our email response, putting them in control of the entire process. If they do request a call, the appropriate senior advisor will make contact, rather than a sales person fielding enquiries, to make sure they get instant access to the advice they need."
The Ask LC service can be found at http://www.leonardcurtis.co.uk/ask_lc
18/09/2008
LC Factoring Advisory Service receives 200 million pounds worth of enquiries in 4 weeks
The LC Factoring Advisory Service, the UK's central resource for factoring advice, is experiencing first hand the trend towards alternative forms of finance. During August, the service, part of rescue and recovery specialist Leonard Curtis, has fielded £200million worth of enquiries.
Les Gordon, Director at the LC Factoring Advisory Service explains: "Earlier this month, ABFA revealed that asset-based finance has become the main lender for UK companies, as traditional bank funding suffers at the hands of the credit crunch (Economic Report, Q2 2008). Owing to their own liquidity issues, banks are becoming increasingly reluctant to lend and as a result we are starting to see ever larger companies turning to factoring as a viable means of improving cashflow.
"Factoring has long been a popular means of raising finance for start-ups or smaller companies, particularly those wishing to fuel rapid growth. Today, however, it is not uncommon for us to find ourselves offering our free advice to companies with more than £40m in turnover, and this recent four-week period has proven that there are now an unprecedented number of larger UK SMEs seeking asset-based finance. The fact that we are able to advise on, and implement, confidential invoice finance services has also proved to be a big selling point."
Leonard Curtis set up the LC Factoring Advisory Service to guide companies through the complex asset-based finance market, and offers free and confidential advice to match clients with funders best suited to their specific needs.
10/09/2008
Top tips on maximising the balance sheet
Cash is king, as the saying goes, and there has never been a more important time to effectively manage the financial risks of your company. Treasury management in 2008 is high on the agenda as businesses have to keep a keen eye on cashflow to survive and stay ahead of the competition.
What are the top tips for companies looking to make sense of their balance sheets and maximise their assets?
Top tips on maximising the balance sheet
1. Negotiate with creditors to extend payment terms.
2. Factor your debts. If you have cash assets tied up in debt, put a factoring/invoice discounting package in place.
3. Improve your collections. Consider outsourcing this to a third party if resourcing this function internally is a challenge.
4. Make fixed assets work for the business. Look at sale and leaseback options to raise capital via plant, machinery or property. However, be sure to take a recent valuation on property and be prepared to have this re-valued every 3 months.
5. Re-visit old costs in the business. Analyse all fixed costs, can you change energy providers, negotiate better terms with suppliers? For instance, if a factory site is no longer at full capacity, there may be opportunities to negotiate a rate reduction with the landlord.
6. Re-structure any VAT or PAYE debt with HMRC. Engage a professional able to work with the HMRC to arrange a time-to-pay arrangement to ring-fence any Crown debt.
7. Assess staff efficiencies. These are tough decisions, but the sooner they are made the sooner the business can be stablised.
8. Move to a just-in-time stock system. This will help to reduce the level of working capital tied up in stock.
9. Sell off any slow moving stock. Even if forced to do this at cost, it is better to reduce storage costs.
10. Use an interim manager. If there are skills gaps in the business that are preventing it from making it through a tough economic cycle, such as a strong Financial Director, then consider using an interim manager to guide the business through a challenging trading period.
02/09/2008
How to put a turnaround manager in place
Article for Construction News Credit Crunch Issue
Turnaround managers are becoming increasingly common. Not surprising as a good one can have a huge impact on a company's performance.
The most important first step when employing a turnaround manager is to correctly identify the skills gap. Is it finance, sales or operations based? A turnaround manager's role is to essentially steady the ship, so it's crucial to accurately pinpoint the aspect of the business that is causing the most concern. When it comes to finding a turnaround manager with the right skill set to match the business' needs, opinions are mixed as to what constitutes the best background. Ex-accountants make ideal interim financial managers; however for sales or operational roles a turnaround professional with relevant industry experience is usually most effective. When looking at potential candidates, key questions to ask are; could this person make an impact immediately? Could they communicate knowledgeably with employees, suppliers and customers? Will they command respect inside and out of the organisation?
In particular for an industry like construction, relevant sector experience is crucial. The nuances of the construction sector demand a turnaround professional familiar with the workings of the industry. Without the knowledge of the specific processes and regulations found in construction, it would be a challenge for any turnaround manager to hit the ground running. Most large accountants and advisors working in the construction sector will have a specialist pool of interim managers with the right experience.
Construction expertise will also help to achieve another key step in hiring a turnaround manager, which is to quickly establish trust and respect between them and the existing senior management team (SMT).
This is absolutely critical. Though the managing director or SMT may recognise the necessity of a turnaround manager, it is essential that there is chemistry and understanding between the two. Provided this is achieved at the top of the organisational tree, it will flow through to the rest of the business. Without senior level buy-in and support, the turnaround manager's task becomes impossible.
09/08/2008
Free hour advice sessions for struggling businesses
Leonard Curtis, the national business rescue and recovery firm, is offering free hour advice sessions for businesses across the UK experiencing difficulties as a result of the economic downturn. Following a national initiative launched by R3, the professional body for insolvency practitioners, members and fellows of the body are offering their expert advice at no-cost.
"The state of the economy doesn't have to mean a dramatic rise in SME casualties" says John Titley, director at Leonard Curtis and member of R3. "Directors experiencing trading difficulties, whether due to loss of customers, soaring costs or poor cashflow, should seek advice as early as possible to avoid problems escalating. To encourage directors to tap into the expertise of insolvency practitioners, we are offering free 1-hour advice sessions to businesses out of our network of national offices."
"Insolvency practitioners are too often seen as the undertakers of the business world", continues Titley. "But the industry is far more likely to look for ways to keep a business afloat rather than letting it sink. The earlier we are involved, the greater the chance is that we can identify ways to keep a company trading successfully."
Leonard Curtis recommends the following top 5 tips to help recession proof your business:
- Keep a tight control on cashflow
- Maintain open and regular communications with banks, funders and advisors
- Get specialist advice at the first sign of trouble
- Analyse business activity - what are the most profitable areas? How healthy is the forecast? Where should the focus be?
- If you have to make changes, such as selling of stock to free capital or downsizing to reduce costs, make them quickly.
25/07/2008
Teetering on the edge, but not falling over
One wrong move from a business in trouble can easily send it into insolvency. Paul Masters, director at Leonard Curtis explores the best course of action.
A company that is struggling may be loathed to take on the additional expense of appointing a turnaround professional. What advice would you give a typical CEO who found themselves in this position?
"Take the plunge; you've got nothing to lose. If the business is failing then 3 month's salary isn't going to make a fundamental difference. Within that time the turnaround manager will have determined whether the company can be saved and what is required to get it back on track."
Name three simple steps that a struggling company could take to minimise the risk of sailing into dangerous waters?
"Get control of your cashflow, don't over rely on one customer or supplier and monitor the business key performance indicators. It comes down to staying solvent, spreading risk and making sure operations are focused on those areas where the greatest opportunity lies."
As market trends dictate the pace of the economy, how important is it for businesses to look at ways to develop products and services for new markets or even diversify?
"It's always difficult to look ahead when trading is tough and the focus is on controlling cash flow. But any company's future depends on its long-term commercial viability, so it is essential management continues to invest in expanding the offer and its markets. We work with funders that cater specifically for businesses bringing new products to market, with finance packages to ensure a consistent supply of working capital to support on-going investment."
LC case study
"We advise many businesses that have encountered cash flow problems because of mounting VAT and PAYE payments, or Crown arrears," comments Paul Masters. "By collating the right financial reports and demonstrating the long-term sustainability of the business, we are able to negotiate time-to-pay arrangements with HM Revenue and Customs (HMRC). This immediately frees up more working capital for the company and is often enough to help management steady the ship."
An East Midlands based graphics business, employing 300 staff and turning over £12m per annum, was experiencing severe cash flow problems due to Crown arrears of £1.2m. Following an exhaustive due diligence exercise, Leonard Curtis was able to reschedule payments to HMRC over 24 months to give the business the breathing space it needed. The company continues to trade successfully and the arrangement has safe-guarded its future.
07/07/2008
Demand for re-finance packages rises as reality bites for SMEs
Enquiries for re-finance packages have more than doubled in the past two months, according to the LC Factoring Advisory Service, a part of business rescue and recovery firm Leonard Curtis. The service, which provides independent advice to small and medium sized enterprises (SMEs) when considering re-finance options, has experienced a record number of requests for information via its website.
The combined impact of a downturn in the economy and due quarter commercial rent and bank re-payments has left many SMEs short on cash. As a result alternative methods of raising funds, such as asset-based lending (ABL) and invoice discounting, are becoming more popular.
"This hike in online requests for re-financing advice is of little surprise," comments Les Gordon, director at the LC Factoring Advisory Service. "There are few SMEs that are cash rich, particularly at the moment, and the double whammy of rent and bank payments will leave many struggling.
"Factoring is a way for businesses to raise funds quickly using existing assets or the debtor book, and so is a very sensible method for business directors to better manage cashflow without having to approach reluctant banks or give equity away."
The website also received a high number of requests from businesses looking to revise existing factoring packages. "This is similar to re-mortgaging," continues Gordon, "businesses are looking to get a better deal. The challenge is that factoring companies are more risk averse than they were 6 months ago, so owner managers must be prepared to show detailed strategic and financial forecasts to prove the viability of the business."
The increase in online enquiries prompted the firm to develop a confidential agony aunt, named Elsie, to answer anonymous requests for advice from owner managers and financial directors. "Most business owners are reluctant to talk openly about trading and cash flow difficulties," says Gordon, "so this online tool is great. It helps managers take the first step to seeking help sooner than they typically do if they have to talk or meet with an advisor face to face. In today's climate, getting advice early can be the difference between a company's survival and its demise."
02/07/2008
IT is tough out there
IT is tough out there! The credit crunch has seen the cost of borrowing soar and many banks stand accused of having ‘shut up shop.'
So where does this leave the UK deals market? Certainly a number of deals have got away and many of the UK's dealmakers are claiming they have ‘never been as busy'.
But with the credit squeeze tightening, falling stock markets and the possibility of further interest rate hikes amid rising inflation - Stephen Fern, director at LC Corporate Strategies comments on the prognosis for 2008.
"The lack of capital and increasingly risk averse approach of the banks has left some areas of the deals market struggling. However the activity at the lower end of the market is on the rise. More SMEs, particularly in the retail, construction and haulage sectors, are falling victim to the impact of a slowing economy, stagflation and persistently rising raw material costs and are looking for a trade sale.
"Similarly we are being approached by more entrepreneurs looking to take advantage of market conditions by acquiring companies that have gone into administration. Although these entrepreneurs have been given the slightly unfavourable tag of ‘bargain hunters', ultimately it is this activity at the lower end of the corporate finance scale that is helping to sustain the SME sector. It is in everyone's best interest that a business comes out of administration to trade on in some guise, rather than being declared insolvent."
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: Fiona McFadden/ 0161 876 5522 / 07788 572271 / fiona.mcfadden@gyrointernational.com