Companies are failing to manage Debt Collection and Credit terms

Many companies are risking their own solvency and ability to carry on trading because they neither manage their debt collection proactively nor have clear procedures for setting and imposing credit terms with their customers. Consequently they are suffering from late payments, or worse having to write off invoices due to bad debts.

They compound the problem by extending credit to customers who turn out to be a bad risk.  If a customer is itself borrowing money under a factoring or invoice discount facility then the company is depending on their customer’s customers thus creating a pack of cards that if recoursed as a bad debt after 90 days could bring down everyone in a supply chain.

I believe the root of the problem to be the company’s own credit management where I find that very few companies have a robust system in place.

The key steps are to do a credit check on any new customer, to set limits, manage them and regularly review customers’ credit levels.

Getting paid however requires more than just a credit check, it involves starting management of invoice payment long before it is due. Checking the invoice is approved for payment for example, will avoid discovering that the order was not fulfilled exactly as required, or the invoice has not been received! 

Paperwork is crucial. There should be a procedure in place whereby the delivered/ completed order is signed for/ off with a clause on the document that includes written confirmation that the customer’s requirement has been satisfactorily fulfilled.

In addition companies also need late payment procedures. If an invoice remains unpaid after the due date, a robust system for managing late and non paying customers should include putting a stop on processing any further orders and debt collection that may result in litigation, and enforcement if necessary.

HMRC Insolvency and Enforcement workload

The HM Revenue and Customs insolvency and enforcement department in Worthing appears to have an increasing workload.

I believe there are several likely reasons for this. Businesses are continuing to withhold payment of PAYE and VAT liabilities, using any cash available to prop up their businesses. Fewer Time to Pay arrangements are being approved by HMRC and a lot of TTP arrangements are failing. The Revenue have also have resumed using seizure and distraint as a method for collecting overdue tax.

HMRC in Worthing are picking up the pieces, which probably explains the large number of Winding Up Petitions that dominate the Companies Winding Up Courts.

The only options for saving a company with a WUP are either paying the undisputed amount due or a Company Voluntary Arrangement and the Courts are generally happy to adjourn the Petition at the first hearing to allow time to either pay the bill or propose a CVA.

There is considerable evidence that HMRC are supporting the rescue of companies via CVAs although their focus is on proposals being realistic and incorporating fundamental change to ensure survival rather than continuing the old business model.

I am not yet clear whether the upsurge in HMRC Worthing’s activity relates to the traditional post recession increases in company failures when the market begins to grow, or whether the downturn is continuing and companies are just not able to hang on any longer.

However all of us in the restructuring profession must urge the directors of companies in difficulties to act urgently if they are to save their company, and that they or we as advisers keep HMRC fully informed of progress during the development of rescue plans.

Don’t Waste Your Money Marketing

When business owners run short of cash they get desperate. They pretend nothing is wrong and often they pick up marketing ideas. These activities would have been helpful at an earlier stage. Applying them indiscriminately without understanding the context of how the concepts work as part of a strategy late in the day is disastrous.
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Small Business Marketing Needs Innovation and Commitment

It is a natural reaction in tough economic times for businesses to look at their various activities and identify costs that can be cut back.

One area they traditionally prune is the marketing budget but this can be counter-productive for small businesses that need to protect their sales revenue, retain existing customers and keep the orders coming in.

A business rescue adviser brought in to help a company in difficulty will closely examine spending and in the process help develop a new business plan which will include innovative marketing aimed at generating sales at a lower cost.

In situations where a number of businesses are failing a small business also has to think carefully about remaining visible or risk potential and actual clients assuming that it has ceased trading and look around for an alternative supplier that has remained visible.

There is some evidence that small businesses are becoming highly innovative about their marketing. Instead of employing an in-house marketing team, for example, they are outsourcing their marketing and buying services only as and when they need them.

Joining a business networking club is one example of a cost effective trend that has been growing for some time.  But it is not a short term fix and many businesses leave it too late, joining only when they realise they are in trouble.

Networking needs commitment and it takes time to get to know the other businesses represented and understand exactly what they do. It works on the truism that ‘people buy from people’ and there needs to be trust as well as synergy.  This is unlikely to happen in less than six months of becoming a member of a club.

Too often people frantically try to sell their services rather than listening and learning about the other businesses in the club. It is vital to follow up with every member once you have joined and learn more about each other even if you can’t immediately see any synergy.

Are Estate Agencies Safer Businesses Now than they were in 2008?

The sub prime mortgage crisis that precipitated the 2008 global recession led to plummeting property prices, very limited mortgage lending, repossessions and to a dramatic slump in the housing and commercial property markets.

Estate agencies were among the first businesses to feel the effects of the crisis. By December 2008 an estimated 40,000 employees had lost their jobs while around 4,000 estate agency offices -approximately one in four – had closed.

The smallest agencies, of perhaps four or five branches or less, were worst affected particularly if they depended solely on property sales.

So is the worst over now for the estate agency business? Not if the most recent information on the housing market is any indication.

Gross mortgage lending declined to an estimated £9.8 billion in April 2011, down 14% from £11.4 billion in March and the number of mortgages approved for house purchases hit a new low in April, at 45,166, the lowest April figure since records began in 1992.

The Council of Mortgage Lenders predicts that the numbers of homes repossessed will rise from 36,000 in 2010 to 40,000 in 2011 and 45,000 in 2012 and the online housing company Rightmove reports that average unsold stock rose from 74 to 76 properties per branch, reaching the highest ever level for May.

Although the housing market varies significantly in different parts of the UK, with London booming and East Anglia holding steady while the north suffers there is also evidence that the demand for rented property and buy to let property is rising along with rent levels.

None of this suggests that the business of estate agency is likely to be any more secure for a few years yet.  If the High Street agents are to survive they need to revisit their business models, diversify their activities into letting, make use of online marketing and be sure they are up to speed on all the regulations governing landlords’ and tenants rights’ and other property letting regulations.

It is obvious why Bank Fees are High and Business Lending is so Difficult

The figures for January to March showed a shortfall of 12% against the £19bn that represents a quarter of the annual £76bn target agreed with the government under the Project Merlin scheme for lending to smaller businesses.

Only 16% of FSB members had approached banks for credit and 44% of those had been refused, including some seeking credit to fulfil firm orders.

Growing businesses need working capital to fund the goods, materials, marketing and staff for new growth. While some of that can be obtained by borrowing against the sales ledger (through factoring and invoice discounting), the banks are seeing them as too high risk.

This is actually a reasonable response by the banks where businesses have been clinging on by their fingernails since the 2008 recession and, having used up most of their working capital on paying down old loans, are therefore according to the bank models seen as at high risk of insolvency.

It is a vicious circle. Less working capital means businesses neither have sufficient funds to buy materials to fulfil orders nor are they adequately capitalised to justify new loans.  This is why it is very common for businesses to go bust when growth returns following a recession.

Once banks are realising that a company with outstanding debt is in difficulty, they are providing for the bad debt by adjusting their own capital ratios to cushion against increased risk and in anticipation of the new Basel lll rules requiring bank Tier 1 capital holdings (equity + retained earnings) to rise from 2% to 7% to be phased in from 2015 to 2018.  

The result is higher fees and higher interest rates to businesses and it is no surprise that some companies already seen as a bad risk cannot borrow money, even when orders are rising.

Businesses that have used their land and buildings to secure loans or mortgages may also face huge risk related costs due to the bank’s exposure because banks already have so much commercial property as security that cannot be either leased or sold. The bank will therefore impose penal fees in a bid to recover the provisioning costs.

It has never been more urgent for businesses to mitigate this catch 22 by calling on expert help to look at fundamental solutions and recognise they will not be able to borrow money to limp along as they have been for the last two years.

Franchising Can Be Great if You do the Research and Check the Small Print

Many people dream of owning their own business and in the current economic climate are finding themselves pitched into starting up perhaps before they are quite ready.

A franchise often comes with an established brand, support in training, promotional materials and advice so it is tempting to see buying into a franchise as a safer option than going into business completely independently. 

But sinking savings or redundancy payments into any kind of business is a risk and a franchise is no different.

The big danger in taking on a franchise is getting a false sense of security that someone else is responsible for your business. They aren’t and a business plan is as important for a franchisee as for an independent trader.

Also, while the franchise provides support, it may also impose limits on independent action in order to protect its brand and reputation. The most successful franchises have tested their business model and methods and incorporated these into the package. It can happen that a franchise has failed because the franchisee has failed to follow the advice.

In a recent case of a franchise business in difficulty one of the biggest issues was that the franchisor declined to take any legal steps to protect its intellectual property or its franchisees’ rights.  

The franchise model offered complete geographical coverage and each local franchise unit’s success depended on the whole network‘s efficiency, but there was nothing to stop people who had gained privileged knowledge within the franchise from setting up in competition.

It is essential when setting up any business to scrutinise any legalities required, take advice and to negotiate. Until comfortable with the terms do not buy into a franchise.

Essentially, yes, a franchise can be a very good business opportunity but it does not eliminate much of the risk inherent in setting up a business and needs the same preparation work as for any business start-up.

Do Small Businesses Understand Working Capital and Liquidity?

When borrowing against current assets, such as the sales ledger using factoring or invoice discounting or against fixed assets like plant and machinery or property, there seems to be a widespread misunderstanding among businesses about business funding and, in particular, working capital.

While credit is the most common form of finance there are many other sources of finance and ways to generate cash or other liquid assets that provide working capital. Understanding these is fundamental to ensure a company is not left short of cash.

Businesses in different situations require finance tailored to their specific needs. Too often the wrong funding model results in businesses becoming insolvent, facing failure or some degree of painful restructuring. In spite of this, borrowing against the book debts unlike funding a property purchase is a form of working capital.

Tony Groom, of K2 Business Rescue, explains: “Most growing companies need additional working capital to fund growth since they need to fund the work before being paid. For a stable business where sales are not growing, current assets ought to be the same as current liabilities, often achieved by giving and taking similar credit terms. When sales are in decline, the need for working capital should be reducing with the company accruing surplus cash.”

Restructuring a business offers the opportunity of changing its operating and financial models to achieve a funding structure appropriate to supporting the strategy, whether growth, stability or decline. Dealing with liabilities, by refinancing over a longer period, converting debt to equity or writing them off via a Company Voluntary Arrangement (CVA), can significantly improve liquidity and hence working capital.

While factoring or invoice discounting, like credit, are brilliant for funding growth, businesses should be wary of building up liabilities to suppliers if they have already pledged their sales ledger leaving them with no current assets to pay creditors.

A Significant Increase in Winding Up Petitions

The last couple of months have seen a significant increase in the numbers of Winding Up Petitions (WUPs) being filed in the High Court.

K2 Business Rescue has been monitoring the number of petitions and notes that since April 2011 they have significantly increased.

Weekly averages of 100 WUPs were filed during February and March and have increased to 150 per week in April and May. This compares to a weekly average of 92 during the last quarter of 2010

Many companies in difficulty have been hanging on by their fingernails while hoping their sales will pick up.

While the picture and possible explanations are unlikely to be clear until the quarterly insolvency statistics are released, the increase in the number of petitions is likely to have been influenced by the enduring lack of cash with businesses trying to collect in their overdue debts.

A WUP is normally only filed after efforts to collect payment have been exhausted or more often ignored where the petition is a last resort, the result of frustration. This is certainly the case with HMRC who file most of the petitions.

In view of the rising numbers of compulsory WUPs it is possible that they may overtake the previously historically higher numbers of voluntary liquidations as creditors run out of patience.

Saving the High Street

Retail pain continues with the news that Mothercare is to close a third of its 373 UK stores.

JJB Sports has just announced losses 0f £181.4 million for the year to 30 January 2011, three times the previous year’s loss of £68.6 million and plan to close 89 of their 247 stores over the next two years.

And HMV has just had to sell Waterstone’s for £53 million to pay down some of its £170 million of debt. In addition, they also propose to close 40 stores.

Oddbin’s too, has gone like most other wine retail chains, following its failed attempt to agree a restructuring plan with creditors, which was rejected by HMRC.

Plainly there is a major earthquake taking place on the High Street, and it is not all about cutbacks in consumer spending. More importantly retail purchasing is changing. Consumers are becoming sharper shoppers by looking elsewhere, not just in the High Street.  They are visiting dedicated retail parks combining shopping and leisure to offer an experience, entertainment and convenience in one place and are also increasing their online spending.

The government has recently asked Mary ‘Queen of Shops’ Portas to take a look at the country’s High Streets and come up with suggestions for rescuing them, clearly hoping to find a way of rejuvenating this part of the UK economy.

She may well conclude that the competition from shopping and leisure centres with their easy access via car and public transport is too much and that the High Street can survive but only if it offers something different.

Locals still like to buy from local shops that provide a personal service, ideally selling local produce such as farm-sourced. This ought to support retailers like the grocer who lets you taste a piece of cheese before you buy, independent butchers who will advise, trim or even marinate meat and local bakers. Pubs, restaurants and cafes that cater for families, young people, the elderly all play their part in supporting community, even the self-help run library. But for the High Street to avoid further decline, everyone needs to work together and this will require leadership.

You never know, the High Street may be once again be a place where shopping is an enjoyable experience, but what will it look like?