Why Stakeholders’ co-operation is vital to successful business restructuring

Restructuring needs supportRestructuring a business can involve significant changes that can have an impact on all its stakeholders.

Usually, restructuring is associated with both financial restructuring and reorganising operations because a business is no longer viable. It may be that it is experiencing cash flow problems and heading for or deemed to be insolvent.

The wise business will act as early as possible once problems are identified and may call in a restructuring and turnaround adviser who will conduct a deep and thorough review covering its processes, products or services, its accounts and forecasts and its business model before suggesting a strategy that will allow it to continue trading and recover its position.

This may involve closing loss-making product or service lines, outsourcing some processes, renegotiating terms with suppliers, possibly reducing the workforce or the hours worked and, in some instances, changing the business model. The financial restructuring may involve rescheduling debts and in extreme cases using a formal process like a CVA (Company Voluntary Arrangement).

Who are the stakeholders in business restructuring?

Stakeholders are people and organisations whose interests are affected by the restructuring, or those who can influence them.

They therefore include a wide community including banks, creditors, credit insurers, directors, employees, owners (shareholders), landlords, new investors, suppliers, unions, and arguably customers. In some instances, the government, public and press might also be regarded as stakeholders, as is the case when the company is a large employer or a critical service provider.

For a restructuring to be successful the response and support of these people and organisations is likely to be critical to both approval of proposals and future success.

Directors need to speak with a united voice and be transparent with everyone if they are to get the trust of stakeholders for their proposals. They also need to find a balance between humility, taking responsibility for past failings, while at the same time providing leadership and direction for the proposed changes. If the company is facing insolvency as directors also need to subordinate their own self interests in favour of those of creditors and the company.

Rescheduling debts normally needs the approval of each and every creditor although a minority of dissenting or ransom creditors can be bound by using a CVA.

More important is to ensure ongoing supplies and support will be necessary. This support includes employees who might be poached or look for alternative employment, suppliers who might be wary of extending further credit, trade insurers, asset-based lenders who finance critical equipment, even customers who can take their business elsewhere.

The support of employees should not be taken for granted. While they may be fearful of losing their jobs and may be asked to accept some alterations to their remuneration, hours of work or the work they do, negotiating this can be fraught with complications since you will not want to demotivate them in the process. Notwithstanding the potential loss of morale and survivors’ guilt felt by those who keep their jobs when others are made redundant, employment legislation needs to be observed if costly tribunals are to be avoided. This is where employees’ union(s) or representatives can be useful and should be brought into the discussions as early as possible. Employees’ co-operation and support can make all the difference to success or failure.

The critical argument that should enlist the support of all stakeholders is that it is in their interests to support the business through the process of restructuring, however uncomfortable it might be in the short term.

The justification is likely to be survival, recovery and eventual growth of the business for the benefit of everyone in the medium and long term.

How do we fix the UK’s IT skills shortage?

women and IT skills shortageThe shortage of people in the UK with IT skills is hardly news. For several years now, the sector has been relying on international workers to fill the gap.

However, the continuing uncertainty over the outcome of the Brexit negotiations has been compounding the recruitment problem as some overseas workers leave the UK and fewer are willing to come to the country.

Surveys in the tech sector have found that 50% of respondents have reported the skills shortage as a serious problem, of whom 25% said recruitment was a major challenge.

It has been calculated that UK digital sector will need nearly 300,000 new recruits by 2020 if it is to reach its full potential.

Are there any short-term fixes for the IT skills shortage?

Given the implications for business growth and development, the problem is becoming urgent.

However, increasing the numbers of well-qualified UK IT professionals is likely to take some time.

The most immediate actions businesses can take may be to look at some of their current processes and the skills profile of their existing employees.

There may be processes, particularly in manufacturing, that can be automated or others that could be outsourced. This would free some of the existing workforce for re-training and re-deployment. Of course, the results would not be immediate, but it could yield hitherto unsuspected benefits.

There may also be people in the existing workforce not currently employed for their IT skills but with some knowledge already that can be built on. Equally, offering employees further training has other benefits and not least their feeling valued and more secure in their employment.

Long-term solutions

Research has shown that women are under-represented in the IT sector. By challenging stereotypes businesses can encourage more girls to consider this as a future career. This should therefore start in schools.

Employers can help with this by getting more involved with universities, training colleges and local schools, perhaps simply at the level of encouraging school visits, holding in-school workshops and activities and by publicising the range of their activities in the workplace that need IT skills.

Inviting promising students into their businesses for work experience and to help with projects to give them a wider range of IT experiences may also help.

Sponsoring graduates or technical courses is another initiative worth considering.

Developing an apprenticeship scheme is something that more businesses need to do. This need not be limited to school leavers but can be offered to graduates, people looking to change career and indeed those who have retired but want to return to work.

Businesses may argue that they do not have the time or capacity to get involved in these initiatives, but there is a balance to be struck between the present and the future and if the shortage is impeding on their plans for development and growth then it makes sense to invest time, money and effort now rather than watch competitors take over.

Are managers redundant?

managers redundant to corporate structureAll four of the UK’s big superstore chains, Sainsbury, Tesco, Morrisons and Asda, have announced plans to make significant changes to their staffing structures, mainly affecting store managers.

Department store, Debenhams, has also announced plans to cut its store managers by a quarter.

All the retailers said they were facing a more challenging environment, not only because of intense competition from budget retailers, Aldi and Lidl, but also because consumers were becoming more price conscious as well as changing their buying behaviour.

Sainsbury’s hope to save £500 million over three years, but, in common with the other retailers mentioned, also said the changes will introduce “a more efficient and effective structure”.

Stripping out layers of management is nothing new. It has been used as a favourite cost-cutting tool by businesses in the past, most notably in the 1990s.

In some instances, no one notices when a layer of management is removed, but in others it can leave a void, especially in those where staff have not been empowered to make decisions.

Removing layers of management can improve productivity

One of the most significant organisational differences between SMEs and large corporations is their flexibility and ability to communicate throughout the organisation.

On the whole, SMEs have fewer layers of management and this enables them to adapt more quickly to change and to discuss and communicate plans to all their employees. This flexibility can attributed to everyone feeling part of a team, and where necessary doing each other’s job. There is often no need to defer to a manager for a decision.

Larger organisations, on the other hand, tend to have much more complex structures with more rigid procedures. Communication normally passes from the top down, from senior management through numerous layers to the workforce. Where decisions have to be made this is still down to managers or decision-making committees. Everyone simply follows procedures.

This makes it hard for initiative and feedback up through the layers of management. The focus is on lean structures and optimal efficiency. However, this runs the risk of suppressing initiative and reducing scope for employee consultation. As a result, larger businesses are often unable to react swiftly in a world where the pace of change is accelerating.  

A flatter structure assumes even more rigid procedures albeit ones increasingly being overseen by workers instead of managers.

The challenge is to improve productivity while at the same time empowering staff by giving them scope for taking their own initiative. Or is the next step automation and self-service retailing?

Conflict of interests for insolvency practitioners doing restructuring & turnaround work

conflict of interestsWhen a business is either in financial difficulty or heading that way, I would always advise getting expert help and the earlier the better.

Leave it too late, to when the business is formally insolvent, and the opportunity to restructure and survive becomes much more constrained.

But insolvency, whether actual or approaching, is characterised by a cash flow problem and advice doesn’t come cheap.

This is because advisers need in-depth knowledge and experience in a wide variety of disciplines. They include experience of business processes and finances including the ability to analyse accounts, cash flow forecasts as well as know the various legal compliance issues including HR and redundancy, insolvency law and litigation. They also need to be familiar with options for restructuring and negotiating them with stakeholders including banks, shareholders, HMRC, creditors and enforcement officers.

While restructuring and turnaround advisers and insolvency practitioners generally have this knowledge and experience, their approaches are very different.

Insolvency practitioners are appointed by creditors and work for their interests, while restructuring and turnaround advisers are appointed by the company and primarily work for its interests.

When a company is insolvent all board advisers essentially become shadow directors and as such their advice should be in the creditors’ best interests, however this does not mean the company should be liquidated, which is the normal outcome that follows the appointment of an insolvency practitioner.

Consensual restructuring with the approval of creditors should offer them a far better outcome providing the underlying causes of the financial situation are addressed – hence the need for turnaround alongside any financial restructuring.

The crucial difference between the two is that the restructuring and turnaround adviser will have your company’s best interests at heart. Their fees ought to be success based and linked to their ability to save your business and their rates are generally far less than those for insolvency practitioners. Call them in early enough and let them carry out an in-depth investigation of all aspects of your business and they will identify what, if any, parts are unprofitable and should be discontinued as well as ways of restructuring debt that can save the company, albeit in a modified form.

Although a business in difficulty can enlist the services of an insolvency practitioner as an adviser, their focus and experience are more likely to have been on recovering creditors’ money at the earliest opportunity. They may not, therefore, be open to options that could lengthen the time it would take for creditors to be satisfied and their focus is more likely to be on realising the value of your business’ assets and preventing further losses, therefore the likely outcome is liquidating the assets of the company rather than saving it.

While insolvency practitioners claim to do restructuring and turnaround work I believe this is a conflict of interests since they cannot serve two masters: creditors and the company. If they do restructuring and turnaround work, they should not take formal insolvency appointments.

It would be better, therefore, for restructuring and turnaround advisers to be entirely separate from insolvency practitioners.

What are the main ingredients to include in monthly Management Accounts?

Ingredients in Management AccountsRegularly reviewing your Management Accounts is one of the most helpful ways for you to monitor the performance of your business.

It is essential to monitor the right metrics so you know how the business is doing and can make adjustments as appropriate.

There is no legal requirement for a company to produce Management Accounts on a regular basis but waiting for the Annual Accounts is too late if you want to make the ongoing adjustments necessary to improve productivity.

The frequency, quality and type of information they contain is therefore crucial.

Ideally, Management Accounts should be produced monthly and should contain an up to date Balance Sheet, a detailed Profit and Loss statement, a Trial Balance and summaries of Aged Debtors and Creditors.

The Balance Sheet shows the company’s assets and liabilities and how much money the business owes to suppliers at any one point in time as well as how much money it has in the bank. Central to this is the cashflow, which needs to be well-managed.

The Profit and Loss (P&L) statement ought to report both monthly and year to date figures. Overall it is a measure of the business’ health although some companies make profits but poor cash flow by not getting paid. The P&L can also be used for much more by reporting sales by market or product sector and their associated cost of those sales and direct costs to monitor margins. It might also group overheads into logical cost areas. so you can monitor the fixed cost elements of your business.

Maintaining a spreadsheet of the monthly P&L is also useful to show trends and monitor the success of marketing initiatives. This spreadsheet in particular is a key tool for establishing a culture of continuous productivity improvement.

The Trial Balance is a useful reference for looking behind the numbers. Essentially all entries in the accounts are allocated to a Nominal Code where the Trial Balance is a list of all the Nominal Codes with a value of all entries against that code. The Balance Sheet and P&L consolidated the values for a number of codes to produce a meaningful report. As an example there may be several different sales codes where the P&L may report only one. I use this example as I have suggested earlier that the P&L report several sales codes since it is easier to monitor the P&L than the Trial Balance.

Another aspect of the Trial Balance is to monitor errors in the accounts since it relies on the double-entry accounting system. If the total debits equal the total credits, the Trial Balance is considered to be balanced.

The Aged Debtors and Aged Creditors are also useful. While I suggest a summary schedule is used to avoid having too many pages of information, the detail reports by customer/ supplier show the individual sales and purchase invoices so you can monitor which ones are outstanding.

The Management Accounts can be a great source of management information but need engagement with your accountant or accounts controller to set up the reports in the first place. If you have the right information you can make the right decisions, it’s all about having the right ingredients.

Businesses should not withdraw employee rights after Brexit

employee rights are importantAs negotiations between the EU and UK on Brexit resume this week, yet another business organisation, The British Chambers of Commerce, has warned that business patience is “wearing thin” over the lack of clarity about the kind of deal being pursued.

In an open letter the BCC’s president Francis Martin and director general Adam Marshall wrote: “Businesses need those elected to govern our country to make choices – and to deliver a clear, unequivocal statement of intent.”

While the focus at the moment may be on the transition period and the eventual trade deal the legal protections for employees are another area of uncertainty for businesses.

In January an article in the Independent warned that many of these rights were enshrined in EU law and could be at risk after Brexit.

They include restrictions on hours worked imposed by the EU Working Time Directive, time off from work, rights to paid holiday and unpaid parental leave, and anti-discrimination laws.

Most vulnerable will be low-paid and “gig” economy workers on zero hours contracts, but there are implications for all employees.

There are good reasons for businesses to maintain employee rights after Brexit

Some employers might see Brexit as an opportunity to reduce employment rights and get more for less from their staff, especially given the likelihood that overseas trade is likely to become even more competitive and costly.

However, there are two major considerations for not following this route.

Firstly, there is already a well-known skills shortage in some sectors, notably Engineering, IT, construction and health care. To at least partially fill the gap businesses have been relying on EU migrant labour, while others have got the message that training existing employees and embarking on apprenticeships is important for the future but this will take time to feed through into a skilled workforce.

Secondly, the UK has been enjoying record levels of employment, which means the pool of available labour is very limited.

But businesses need to plan their staffing needs and in particular how they will recruit and retain staff in a competitive labour market. This might also encourage them to think more about how employees are truly valued. “My people are my greatest asset” might yet become a reality rather than a hollow phrase trotted out by companies that don’t make the effort in a way that is appreciated by their staff.

There is ample evidence that job security is a prerequisite for employee engagement. Job insecurity usually leads to increased absenteeism and staff turnover, decreased productivity and lower levels of trust in employers.

If employees are uncertain about their security, their employment conditions and their rights after Brexit they are unlikely to be committed to their employer.

Communicating and reassuring employees is the key to keeping them involved and feeling valued where failure to do so leads to reduction in productivity.

They really are your greatest asset.

Are businesses waking up to the positive benefits of early restructuring?

Are businesses waking up to the positive benefits of early restructuring?

a building in need of restructuringIn the weeks since the collapse of the facilities management and construction company Carillion, there has been a noticeable increase in companies announcing plans for restructuring.

Capita, the outsourcing company frequently used by local and national government, whose shares have recently dropped by over 50% has just appointed a new CEO to turn it around after finally admitting that it was in financial difficulties.

Other businesses that have come under the spotlight include M & S, which is to close up to 14 of its stores, the burger chain Byrons closing 20 of its branches as part of a CVA rescue plan, House of Fraser looking to negotiate rent reductions, New Look is working on a store closure plan, B & Q axing 130 head office positions, Jamie’s Italian that is doing a CVA and there are employee changes under way at Sainsbury’s, Tesco and Morrisons.

While the majority of recent announcements have been in retail, they are not exclusively so.

What is perhaps more interesting is that efforts to restructure large businesses seem to be happening earlier.

This can only be welcomed as the earlier a business realises that it is, or could be, heading for financial difficulties or insolvency, the greater the likelihood that it will survive, albeit as a slimmed down business.

It is the job of a restructuring and turnaround adviser to carry out a thorough review of every aspect of a business, its products, processes, cash flow, business plan and overheads to identify those parts that are healthy and those that are draining cash or depressing profits.

She or he will make recommendations on anything that needs to change, including those products or services that need to go, as well as those that have potential to grow. Some of this advice may be painful, but it is in the interests of the business to be open to advice and to act on it.

Remember, the restructuring and turnaround adviser is looking to save the business and it is in their interests to help it to survive and grow. They are not insolvency practitioners whose role is to realise assets for creditors.

It goes without saying that the earlier the restructuring process begins, the greater the likelihood of success.

Once a company has appointed an insolvency practitioner its prospects of survival are reduced.

There is a lesson here for businesses of all sizes, from SMEs upwards, and this is to be proactive in monitoring business performance, enlist the help of an experienced restructuring and turnaround adviser at the first signs of trouble and be willing to take their advice, however painful, if the business is to survive and return to profitability.

It is to be hoped that those subcontractors affected by the collapse of Carillion will heed this advice and enlist support sooner rather than later.

A timely reminder to understand Directors’ Duties in insolvency

 

Business insolvency and Directors' DutiesThe collapse of Carillion into liquidation with total liabilities estimated as likely to be in excess of £5 billion is a timely warning to all company directors to know and understand their duties when a company is insolvent.

Many of these are statutory and are mainly to be found in the Insolvency Acts, 1986 and 2000, and the Companies Act 2006. In essence, they are designed to ensure that in such circumstances directors put the interests of the creditors and employees ahead of the company and take decisions that minimise any loss to them due to a shortfall.

It has been estimated that unsecured creditors are likely to receive less than one pence for every £Sterling that they are owed.

Everyone wants to know why and how the situation at Carillion deteriorated so far and whether the directors fulfilled their duties. Within days of its collapse, investigations were announced by the Insolvency Service into the role and remuneration of former and current directors.

The Financial Reporting Council (FRC) is to also investigate the conduct of Carillion’s auditors for the years 2014, 2015 and 2016.

The implications of not complying with Directors’ Duties

It will be some time before the outcomes of the investigations in Carillion’s case will be known but all directors should be aware that, if proven, failure to observe Directors’ Duties comes with significant consequences including the prospect of being held personally liable.

Under the Insolvency Act 1986 directors “should ensure that they obtain regular updates as to of the company’s general financial position to ensure that they are kept fully aware at all times of the solvency or potential insolvency of the company. When the company is made or becomes insolvent the directors must recognise their duty to the company’s creditors, including current, future and contingent creditors.”

If it is deemed that they ought to have known there was no reasonable prospect of avoiding insolvent liquidation they should therefore have done nothing by way of trading that could leave the company worse off.

Understandably, there may be conflicts of interests for directors in this situation, in that they may want to minimise their own liabilities, especially if they have signed personal guarantees as directors.

There is also likely to be a strong desire to try to keep the company alive.

However, if contemplating a decision to carry on trading in the hope of helping their company to survive I would advocate that directors should take advice and engage a restructuring and turnaround specialist who can advise on the proposed actions and help them comply with their duties.

Insolvencies rise in 2017 marking a difficult year for business

insolvencies rise signalling storm clouds overheadThe highest numbers of insolvencies throughout 2017 occurred in the construction and retail sectors according to the lnsolvency Service’s latest revelations on the state of business in England and Wales.

The figures published on January 26 2018 alongside the insolvency statistics for the quarter from October to December 2017 (Q4) showed that overall insolvencies have continued to rise compared with 2016, by 2.5%.

While the numbers of businesses liquidated via administration and CVAs (Company Voluntary Arrangements) both fell, there was a significant increase in those closed by Creditors’ Voluntary Liquidations (CVLs) – up by 8.2%.

A CVL is used by a company’s directors choosing to voluntarily bring the business to an end by appointing a liquidator.

The results indicate that there was a degree of uncertainty for businesses throughout 2017 in the context of the ongoing and opaque negotiations on Brexit, a point reinforced by Duncan Swift, deputy vice president of R3, the insolvency and restructuring trade body.

He said: “The slight rise in corporate insolvencies across 2017 as a whole is a reflection of the difficult year that firms throughout England and Wales have been through,” adding that since 2016 the trend of falling insolvencies had reversed.

Among the “additional headwinds” he cited for 2017 have been the business rate changes, the increase in the National Living Wage, the final stages of pensions auto-enrolment inflation eating into margins with customers reining in on spending.

Clearly it has all been too much for the 15,112 businesses that were declared insolvent in 2017.

On the plus side, manufacturing has been enjoying steady growth due to the weaker £Sterling, and lower numbers of insolvencies between Q3 and Q4, “could hint at improving business conditions overall” he said.

Nevertheless, 2018 is not looking like a time when businesses can relax their vigilance on cash management and I would advise them to be diligent in strengthening their debt collection and credit monitoring to improve cash flow and avoid being caught out by extending credit to future insolvencies like Carillion.

The latest Making Tax Digital updates for SMEs

Making Tax Digital and old fashioned tax collectionIn the distant past tax was simple, it was collected by collectors and stored somewhere safe like in the Treasury at the Great Mosque of Damascus. Incidentally the Mosque was formerly a Christian basilica and is alleged to contains the head of John the Baptist, it is definitely worth a visit for those brave enough to visit Syria.

 

Over the years chancellors have found ever more creative ways to claim tax revenue and we have become collectors filling out increasingly complicated forms and remitting tax due to the treasury. It is however possible that digital filing may reverse the trend by making it simpler for us as tax collectors to complete and file returns, but woe betide those of us who make a mistake.

Research carried out by Ipsos Mori for the Government and released in December has found that 70% of small businesses and landlords are unaware of what will be required of them under the new Making Tax Digital (MTD) initiative.

Do you know what the updated MTD rules are and to whom they apply?

The Government published updates last month outlining some changes to the original MTD plans.

The new rules will apply from April 2019 with pilots before then and they will only apply to businesses with a turnover of £85,000 per year, which is the VAT threshold, and then only for meeting their VAT obligations.

Originally the intention was to phase in full MTD for Income Tax Self-Assessment (ITSA), Value Added Tax (VAT) and Corporation Tax (CT) between tax years 2018/19 and 2020/21. However, widening the scope beyond those above the VAT threshold has been deferred and the Government has pledged that it will introduce expand MDT until the new system is working, and not before April 2020 at the earliest.

Is anyone exempt from Making Tax Digital?

The Government has also published an impact assessment covering people with disabilities and those in rural locations where there is poor broadband.

It has concluded that both groups will find it difficult to comply with MTD.

The report says: “Ultimately, if a business cannot go digital, it will not be required to do so. The exemptions under Making Tax Digital mirror the existing VAT online filing exemption.”

If your business must comply with the MTD then you should allow enough time before the 1st April 2019 deadline to source accounting software that will be compatible with the Government’s system, factor the cost into your cash flow, and familiarise yourself with the process.

Alternatively, if you have an accountant who already files your tax returns online, you might check they are prepared for the new rules and will comply.

It is also worth investigating whether it would be more cost effective and efficient to outsource it to them rather than getting to grips with the software in house. New software is linking bookkeeping with bank accounts to automate the necessary filings so now might be the time to investigate alternatives to your bookkeeping systems and how you produce and file reports.