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General Insolvency Interim Management & Executive Support Rescue, Restructuring & Recovery Turnaround

Directors Could be Storing Up Trouble for Later by Sacrificing Pay and Drawings Now

In the current economic crisis company directors are cutting their drawings and foregoing their salaries in order to save their companies still hoping that the market will recover.
As a result they are retaining costs that their companies cannot afford by sacrificing their personal drawings on the company today.
For how long can, or should, directors sacrifice their income and dividends in order to retain the company’s capacity for growth in the hope the order book fills up?
Once a company’s creditors are affected by a worsening balance sheet then there is a risk that the directors could be held personally liable for the increasing debt if they do not take decisive action to get the situation under control, for example by consulting a business turnaround adviser.
In any event no company can continue in a situation of insolvency for long in the hope of an upturn in the market without taking some measures to try to move it back to profitability.
At the time of writing it is estimated that there are more than 370,000 Time to Pay arrangements between businesses and HM Revenue and Customs (HMRC). Such a huge number suggests that a lot of directors have sacrificed their drawings in order to prop up their company to keep it going in the short-term by deferring payments rather than restructuring the business for long term survival. This highlights the need for a lot of companies to change their business model and significantly cut their costs.
Doing so would benefit a company’s directors, who could then start to pay themselves once the company resumed profitability.
While it may be easy in such circumstances to cut your drawings, pension contributions or health insurance this can only ever be a short term measure. 
Without a proper review of the company or the ability to make profits you may be prejudicing your personal futures.
It is a very rare company that does not need to review its business model from time to time, and it may also be that there is a viable core business buried under the current problems that an objective but supportive turnaround adviser may be able to identify and help the directors to nurture.

Categories
Cash Flow & Forecasting General Insolvency Rescue, Restructuring & Recovery Turnaround

Turnaround Forecasting is About Reality, Not Wishful Thinking

Most forecasting is generally done for lending, fund raising or other investor related purposes and therefore with hope of future growth built into the forecast. Such forecasts show how loans will be repaid and investors will achieve a return on their money. Such forecasts are often more about hope than reality.
On the other hand, a turnaround forecast must be achieved and ideally exceeded and is more oriented towards improving cash flow than making future profits.  Low expectations are set so that the business does better than forecast, especially if the business is looking for support from the bank or additional finance that tends to have expensive penalties for failure. Therefore turnaround forecasting will deal with a level of detail where a turnaround business plan is essential.
So the turnaround forecast is used to show the pre-turnaround business model, and then the costs of implementing the turnaround and then the post-turnaround business model. To illustrate this take the situation of a company recently helped by K2 Business Rescue, that has shrunk and no longer needs two factory units and is looking to consolidate into one to reduce premises costs.
The less expensive but ideal unit needs three-phase electricity installing to operate the heavy equipment that is in the second unit, but the electricity supplier has switched off the power in that unit due to an overdue account. The cost of reinstating the existing supply, however, is similar to the cost of installing the new three-phase supply.
K2’s turnaround forecast showed a significant cash saving if the move was brought forward by investing in the three-phase installation which both cut premises costs and saved the cash that would otherwise have been needed to pay to reinstate electricity as well as install the three-phase. The focus on cash helped make this decision, the profit and loss benefit helped justify it. And the electricity supplier liability was bound in a CVA (company voluntary arrangement).
It challenged the orthodoxy that not spending money is going to save money whereas investing a little now could save a lot later. 
The essential point is to distinguish between short term and medium turn benefits and a turnaround forecast is looking at cash flow in the short and medium term rather. It is dealing in reality rather than hope and incorporated into the medium term is the effects of what fundamental change is being made in the short term.

Categories
Banks, Lenders & Investors Factoring, Invoice Discounting & Asset Finance General Rescue, Restructuring & Recovery Turnaround Winding Up Petitions

A Frozen Bank Account Need Not be the End of a Business

If a bank takes action to freeze a company’s bank account it is an indication that the bank is nervous and under its bank facility terms and conditions has exercised its right to not release funds.
A bank’s behaviour is monitored by its facility people and triggering action to freeze does not imply any expression of judgement or opinion on the business itself.
There are two other circumstances that can trigger a bank account freeze.
The first is when a winding up petition is advertised in the London Gazette, which is a legal requirement before a petition can be heard in the High Court.  In this situation the bank is required to freeze the business account because the bank can be held to be liable for any funds paid out of the account.
A second situation that can trigger a bank account freeze is when there are not sufficient funds in the account, which makes it effectively frozen, even if it hasn’t been done formally by the bank.
It is most likely to happen because the company is not paying money into the account, possibly because its factoring company is not remitting funds to the bank.
A company’s relationship with its bank is aggravated if the company fails to take steps to deal with this situation, putting the bank in the embarrassing position of having to return cheques or direct debits.
Payment returns can also cost a company a great deal of money, adding to the pressure on its cash flow by charging fees but it also causes the bank to more actively monitor the account because the company’s directors are failing to manage it within the facility that has been agreed.
In a situation like this when there are insufficient funds but the bank account is not formally frozen, the directors need to take prompt action, including stopping the release of cheques, cancelling all standing orders and direct debits and taking control of the cash to manage all future payments. This creates a hiatus period during which cash is only released if there are sufficient funds.
During this hiatus period when survival is in jeopardy, directors must manage the company in the best interests of creditors. Payments are only made to meet ongoing costs and those crucial liabilities that need to be paid for to keep the business going.
If, however, the bank account has been formally frozen the directors can only make payments either with the bank’s approval or with an order from the courts.

Categories
General Rescue, Restructuring & Recovery Turnaround

Is Your Business Structure Holding Back Your Success?

The structure of a business is crucial to its success and often it can get in the way of growth.
If a business needs to build another factory, say, then if the funding is not in place to do so that will get in the way of growth. This should be factored into the business model.
Often, in order to correct this kind of issue a business needs to be restructured to give itself the flexibility it might need to survive and grow.
Ideally a regular look at the business structure would be part of the process of continuous improvement to ensure a business is in the best possible shape to meet short term problems,  like an economic downturn and a consequent drop in orders, and to enable it to thrive, grow and expand long term.
Restructuring more often is carried out as a consequence of a business struggling to survive and is one of the tools available to business rescue advisers called in to help a company in difficulties.
An example of what a restructuring adviser can do is the case of a company K2 was involved with that had a break-even point of £3.5 million and whose turnover had declined from £5 million to less than £2.5 million.
In this situation it was clear that, although viable, significant changes were needed. They included closing a factory, getting rid of onerous financial arrangements, terminating some employment contracts and reducing other fixed costs.  The outcome of these actions was to reduce the break-even point to £1.8 million.
A reduction of sales to just under £2.5 million then became a healthy profit rather than a significant loss.
It meant that the unit cost of production was also reduced once it was free of the burden of the finance drain on the equipment.
It might seem that this should have been obvious to those running the company, but it is possible to be too intimately involved in the day to day running of a business, especially one under this kind of stress, and to be unable, therefore to stand back and look at the elements in the structure of the business that are impeding a solution to its changed circumstances.