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Business Development & Marketing Cash Flow & Forecasting Finance General Insolvency

Are you prepared for the next crisis?

crisis preparationFinance may be a primary consideration but it is not the only cost to a business in preparation for a crisis.
Being ill-prepared can damage the relationship with customers and employees, and ultimately, if the crisis is badly handled, it can damage the business’ reputation.
Complex, fast-moving threats to organizations can happen at any time, so being prepared for a crisis is about having the right people having been trained with communication tools and strategy in place ahead of an inevitable yet unforeseen event.
Business management consultants Mossadams produced a useful cost management guide to dealing with a crisis in April 2020, which sets out six elements to pay attention to. These are strategy (covering a customer analysis, product mix, recovery plan and financial forecast), assessing operating models, the trade-off between risks and opportunities, a situation analysis and a financial analysis.
According to the Harvard Business Review “When companies seem ill-prepared in the face of a crisis, the first question people ask typically is, “Where was top management?”
Ideally, it advises, boards should dedicate a block of time each year to better understand and prepare for major threats to the business.
It advises that boards should have both a strategy and a core team at board level trained and ready to deal with the crisis itself, as exemplified by the UK Government’s Cobra (Cabinet Office Briefing Room) group.
Of course, for a business facing a crisis the key is to take control of the messages and immediately review finance. While directors might worry about a hit to profits, in fact they should first and foremost have a plan in place for controlling expenses and for protecting and managing cash flow. Of course, ahead of the event it is wise to build up some financial reserves and to avoid taking on debt wherever possible. The less outside funding a business has to sustain when dealing with a crisis, the better.
Part of preparation for a crisis, however, and arguably as important, is the way it handles its messaging and nurtures the relationships crucial to its continued existence.
Stakeholders, customers and employees are likely to be panicked and worried about their future so communication is essential, not only to keep people informed and reassured in the present but also to protect the business’ future once the crisis is over. Indeed, critical to any crisis is to plan for emerging from the crisis so that the business does not remain in crisis mode.
In a crisis, everyone becomes acutely aware of the behaviour of others. This is therefore a key factor for reassuring stakeholders.
In this context, it really is a case of leading by example, so, perhaps it would be unwise for a business to pay out dividends to its CEO, when others are having their working hours cut or suppliers are receiving fewer orders because a business is scaling back activity..
The lesson is that preparation for a crisis is infinitely preferable to being faced with reaction without it.

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Business Development & Marketing Cash Flow & Forecasting Finance General Insolvency

Potential Coronavirus pandemic business winners and losers

winners and losers in business after lockdownGiven the slight easing of Coronavirus-related restrictions a week ago, some businesses are in the very early stages of preparing to return to “normal” but which businesses are likely to emerge as the winners and losers in the future?
The Insolvency Service is now publishing its figures monthly and the April figures were released last week. They reported that “numbers of companies and individuals entering insolvency in April 2020 broadly returned to pre-lockdown March levels for most insolvency types” and their figures showed that total company insolvencies in April 2020 had decreased by 17% when compared to April 2019, with a total of 1,196 company insolvencies of which the majority were CVLs (Company Voluntary Liquidations). These numbers suggest no influence in insolvency from Coronavirus yet.
The figures come with a warning, however, that the operation of courts and tribunals had been much reduced, HMRC had reduced enforcement activity and there were likely to have been delays in documents being provided to Companies House by insolvency practitioners.
There is some illuminating data from Cebr (Centre for Economics and Business Research) which showed lost output figures, which include 50% in construction, 58% in wholesale and retail, 79% in accommodation and food services, and 81% in arts, entertainment and education. Communication and information, however, is down just 7% and professional and scientific activities are down just 10%.
Perhaps worse are the UK Composite PMI figures which are an indicator of health for manufacturing and service sectors and reported 13.8 in April, down from 36 in March which in turn were down from 53.3 in January. A reading of above 50 represents expansion and below 50 represents contraction where the lowest figure in the last three years was 49.2 in July last year when industry was gloomy about Brexit.
Of course, there is a long way to go before the picture becomes any clearer and the above is just a snapshot at a specific point in time.
Nevertheless, there are some clues to possible future businesses winners and losers and some of this depends on how deep-rooted the changes are in people’s behaviour as we emerge from the crisis.
Clearly, the lockdown has particularly affected the travel, holiday, retail and hospitality sectors as well as theatres, cinemas and the like. The question is whether these will be able to survive for much longer despite the various financial support packages, especially when they still have rents and other overheads to pay.
Similarly, commercial landlords may be affected as it has become clear that many businesses can operate with employees working remotely. According to the BBC last week “Many companies are struggling to pay the rent with 63% collected within 10 days in March and early April compared with 94% a year ago.” It also reported “Office and retail landlord Land Securities has said less than 10% of its office sites are being used as people work from home. This is unlikely to lead to a closure of 90% of offices but it highlights scope for huge cost reduction by businesses
In the meantime, such a rent burden is a major factor for the survival on many businesses and most likely will result in many companies going bust.
Another potential longer-term loser may be the cruise industry. Will people feel comfortable taking holidays on a large ship in a confined space in close proximity to hundreds of others?
While there may eventually be some recovery in the travel and holiday sectors once countries open their facilities and airlines are permitted to resume operations, the question is whether they will ever return to their pre-pandemic volumes since this will dependent on consumer confidence as well as affordability given the likely increase in travel costs and the fact that many people will lose their jobs.
To an extent, also, there is a question mark over the viability of airlines if they have to introduce some social distancing measures and cannot cram their cabins to maximum capacity.
The weaknesses that have been exposed in the global supply chain may also have a negative impact on freight transport.
But this last gives a clue to potential future winners among the business winners and losers.
It is possible that manufacturing may be brought back to UK and more stock will be stored here as a result of the exposed supply chain issues, which may well boost various types of local production and by extension the construction industry which will have to build the greater capacity that will be needed. Indeed, this in turn may benefit those parts of the country that were devasted by the closing down of industry during the Thatcher years.
Similarly, the UK’s pharmaceutical industry and research may become a winner as the search for a Coronavirus vaccine continues, not to mention worries about its availability if one is ever devised, and the Government has already announced £93m to help speed up the construction of a not-for-profit Vaccines Manufacturing and Innovation Centre in Oxfordshire.
The lockdown has also exposed the amount of pollution that had been generated previously and may bring an upsurge in greener energy production.
According to the Guardian last week, “Britain’s biggest green energy companies are on track to deliver multibillion-pound windfarm investments across the north-east of England and Scotland to help power a cleaner economic recovery.”
Another loser is likely to be the car industry as I cannot see as many cars being needed in a future if more people work from home and unemployment rises.
Finally, given the exhortations for people to find alternative ways of getting to work, such as cycling or walking, as lockdown is eased it is possible that another winner could be bicycle manufacture and the retail outlets that provide both bikes, accessories and aftercare.
There will undoubtedly be business winners and losers but the scale of fallout will only emerge when the future becomes clearer. The above are just some preliminary suggestions.
 

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Banks, Lenders & Investors Cash Flow & Forecasting Finance Insolvency Turnaround

The latest insolvency statistics for the first quarter of 2020 don’t tell the whole story

insolvency statistics not the whole storyAstonishingly given the news coverage of a financial fallout due to the Coronavirus pandemic, the latest insolvency statistics for Q1 January to March 2020, show a decrease both when compared to the previous quarter and to the same quarter in 2019.
The figures, published by the Insolvency Service yesterday, showed a total of 3,883 company insolvencies with the majority again being in CVLs (Company Voluntary Liquidations).
This was a decrease of 10% compared with the last quarter of 2019, October to December, and of 6% when compared to January to March quarter of 2019.
Construction continued to have the highest number of insolvencies, followed by the wholesale and retail trade and accommodation and food services.
While these insolvency statistics cover the period before the lockdown due to the Coronavirus pandemic was imposed a drop in insolvencies is still surprising given that economies in the UK and EU had been slowing in previous months.
There is more clarity, however, from the latest Begbies Traynor Red Flag alert figures published on April 17.
They reported their highest-ever numbers of businesses in significant distress at 509,000 with the impact of the lockdown showing 15,000 more businesses in significant distress (3%) compared with Q4 2019. The vast majority of these, they found, were SMEs with under 250 employees.
There is even more concern in the Red Flag figures for businesses in critical distress, which Begbies Traynor regards as a precursor to falling into insolvency. They reported a 10% increase in the last quarter alone, although, as they note, “creditors have been held back from taking court action due to the lockdown”.
The most notable increases, they report, are a 37% increase in bars and restaurants, 21% increase in real estate and property, 11% increase in construction and 8% increase in both general retail and manufacturing.
All this is despite the various financial support measures of grants and loans announced by the Chancellor who has sought to help businesses survive the pandemic.
Having said that, loans need to be repaid and many are concerned about the future prospects for businesses and for some industries that may take some time before they return to normal, not least the Banks who understandably might be reluctant to lend to those who are unlikely to repay their loan. This might explain the numbers of businesses that have been turned down.
In the middle of an unprecedented situation like the current pandemic it is difficult to draw conclusions from trends or make meaningful assumptions about the future number of insolvencies but there is no doubt they will rise significantly.
Historically the rise has been an indicator of the country coming out of a recession although most recessions have been ‘V’ shaped where some are predicting a ‘U’ or even an ‘L’.
Clearly much will depend on for how long the lockdown continues and we should prepare for many companies, particularly those relying on travel, events, hospitality and an already-struggling High Street, to disappear altogether as Warehouse and Oasis have most recently done.
Much will also depend on consumer confidence and spending power – and how many people have lost their jobs but clearly economic and business recovery will be prolonged and painful.
 

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Accounting & Bookkeeping Cash Flow & Forecasting Finance Insolvency Rescue, Restructuring & Recovery

Get expert help with cash flow management in a crisis

cash flow crisisIn the current pandemic situation, many businesses deemed non-essential have been forced to temporarily close for a lockdown period and it is clear that many SMEs will have serious cash flow problems when they resume trading.
Unfortunately, the cash flow problem won’t go away even though for the moment it is easy to ignore it by holing up at home.
While it is true to say that all businesses should have plans for dealing with emergencies and reserves for cash flow problems, it is unprecedented to have to deal with a period of no income and it is becoming clear that many SMEs – and larger businesses – do not have sufficient cash reserves to survive a lengthy lockdown.
Many are telling me that they paid their staff wages for the first month in anticipation of furlough support arriving in time to fund a second month but they are concerned about the Government’s promised CJRS (Coronavirus Job Retention Scheme) arriving in time to pay April wages. As for paying other liabilities such as rent, finance and fixed overheads many of these are being ignored since most SMEs rely on income to pay bills.
It is easy to be wise after the event but, as I have said in my blogs over many years, it is crucial for a business to pay attention to its cash flow and to build up reserves to cushion it from sudden shocks. And yes, as an aside, I do hate factoring and invoice discounting since these only help fund growth and no business can guarantee growth such that in a decline they often starve a business of cash.
While the current situation is unprecedented and it is no surprise that you as a SME owner may be very frightened, it is unlikely that you are in the best position to think clearly about the steps you need to take if cash is running out.
In March, the website Small Business said¨” many small businesses could be forced to make difficult decisions in the coming weeks. Depending on their financial position, some small businesses could start to experience cash flow difficulties very quickly …”
Among its tips for dealing with cash flow crises it advises that you should prepare a cash flow report before seeking financial help such as a time to pay arrangement.
It is helpful to get expert advice to deal with your situation and in particular helping produce the information needed to raise finance and for negotiating with finance companies, HMRC and other creditors.
Crisis management when a company is in financial difficulties is about quelling the understandable panic so that you can manage cash flow and take a long, hard look at the financial and operating options for survival and ensuring the business is viable. This is why objective expert help is so important.
As I said in my blog in February this year: “The most likely immediate priority in managing a liquidity crisis is reducing costs while maximising income.
“So, the first step in managing cash is to construct a 13-week cash flow forecast to help identify risks and actions that can be taken to reduce them. It should include income from sales and other receipts and outgoings, both to ongoing obligations such as rent wages and finance and to creditors.”
It is easy to say with hindsight that SMEs should have built up cash reserves when times were less challenging but you are where you are and calling on an expert to help you with cash flow management will give you a better insight into how you might be able to keep your business afloat.
You can find out more about the government financial help available in my free downloadable guide.
https://www.onlineturnaroundguru.com/support-for-smes-struggling-to-deal-with-coronavirus-pandemic
 

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Banks, Lenders & Investors Cash Flow & Forecasting Finance Insolvency

SMEs applying for support under the Coronavirus Business Interruption Loan Scheme should read the small print

read the small print in offered helpGrabbing a lifebelt when you are drowning makes sense, but when that so-called lifebelt is a business loan to survive the Coronavirus pandemic, you need to read the small print before signing on the dotted line.
The various government support schemes for SMEs may have made big headlines, not least their claims about making loans available for SMEs, but the devil is likely to be in the details.
No matter how panic-stricken you might be it is worth making sure you know exactly what you are getting into when applying for a loan under the Coronavirus Business Interruption Loan Scheme (CBILS). The difficulty many businesses are having getting through to someone at the bank is an indication of the problem, albeit it is hardly surprising given that banks have run down their SME support teams over the past twelve years.
Before even contacting a bank the first step is to take a deep breath and ensure you know exactly who to approach and what you can apply for. There are ample details about the process on the British Business Bank website here. However, the reality is that banks are likely to prioritise their own customers and among them, their long term ones.
The next step is to prepare a forecast showing how much is needed, what it will be used for and how a loan will be repaid.
Most banks have now undertaken to not pass on their usual loan application fees to customers because the Government has promised to cover the first 12 months of these and the interest payments.
However, you should be mindful of what happens after that in terms of your liabilities. According to the BBB website: “The lender has the authority to decide whether to offer you finance. If it can do so on normal commercial terms without having to make use of the scheme, it will”. This means you may be offered a loan but not under CBILS.
The Big Four banks have agreed that they will not take a personal guarantee (PG) from directors as security for lending below £250,000. However, this message hasn’t trickled down the chain in all cases such that managers are still demanding them. The other issue is that non CBILS loans may be offered in which cases the bank can request PGs and in some instances may want a charge over your home.
Despite there being 40 lenders listed as offering loans under CBILS, in practice most of them are small regional lenders who will not apply to you although they are worth checking out to see if you meet their criteria.
For years I have cautioned those seeking business finance and have advised directors to be extra careful about guarantees so make sure to read and understand what you are letting yourself in for. Indeed, I would also advocate involving your spouse in the decision if there is the slightest prospect of you losing your home. These loans are often sold by ‘nice’ banks to ‘nasty’ ones.
Surviving this dreadful situation is fraught with complexity. Decisions about staff with scope for furloughing them is one area that is complicated since contracts of employment must be honoured – there is a link for some good advice on all this from Acas.
Decisions about delaying payments to suppliers and other creditors is another huge issue, while it may be expedient, not paying liabilities as and when they fall due means that a company is insolvent.
It may be tedious, but you need to consider the possible consequences of decisions taken in the heat of the moment so you need to approach problems in a calm and rational manner and ideally you should discuss them with turnaround and insolvency professionals who have considerable experience dealing with such crisis situations.
Whatever you do, don’t just focus on the immediate benefits of decisions but consider the second and third order consequences of decisions before acting on them, despite this caution don’t delay action, most of it is common sense.
Check out https://www.onlineturnaroundguru.com/ for more tips on survival
 

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Business Development & Marketing Cash Flow & Forecasting Finance General Insolvency

Using the Pareto 80/20 Rule as a guide in your business

Pareto 80?20 RuleMany people in business are familiar with the Pareto 80/20 Rule, particularly the idea that 80% of their business comes from just 20% of customers or clients, or that 80% of their profits comes from 20% of orders, or that 80% of their profits come from 20% of products, or even that 80% of their sales are generated by 20% of their sales staff.
Understanding this can influence behaviour such as protecting the 20% that contribute the most or looking at how to improve the lower performing 80%.
Essentially the Pareto 80/20 Rule is simply a way of demonstrating that most things in life are not distributed evenly.
This can apply to everything but focuses on considering productivity as an output of time spent or as a return on investment. It looks at resources, in terms of people, time and cost with a view to optimising the output. Analysis of turnover and profits by customer, market segment and products to produce a pie chart is likely to highlight aspects of the Rule.
The 80/20 Rule is a guide that can be misused, While 20% workers may be measured as doing 80% of the work this rarely means that the work of remaining 80% is irrelevant. Indeed, it may be that 20% contribute to profitable work while 80% are necessary for the 20% to be productive. It does however show where to focus on improvements.
So how can businesses use the Pareto 80/20 Rule to improve their businesses?
To a large extent this is about identifying the processes, systems or activities on which to focus because they have the best potential for a return on the effort.
You might focus attention on customers perhaps with view to selling more to your best customers or to improving sales to the 80% with view to generating the same level of return as the 20%. This might be putting prices up or selling different products or even turning away unprofitable business or customers who are hard work.
You might focus on staff perhaps with a view to measuring and improving their working practices that in turn improve productivity. Can one person be trained to do several jobs? Or should teams be reorganised or shift patterns altered? Sales and delivery may benefit from reorganising those geographical or market segments for which they are responsible.
You might focus on your products and production. Do you reduce the number of suppliers or the stock held or number of products sold. Can one product replace several existing products? Should you outsource the manufacture of components?
The Pareto 80/20 Rule is, in short, a handy guide to where you might focus your attention for improvement, it should not be regarded as a fixed and immutable rule.

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Banks, Lenders & Investors Cash Flow & Forecasting Finance General Insolvency

Something for everyone in the Spring budget – but will it be delivered?

Spring budgetWho could envy a Chancellor having to deliver a Spring budget just one month into the job and in the midst of a global pandemic?
The Spring budget came after the early morning announcement of by the BoE (Bank of England) of an interest rate cut from 0.75% to 0.25%. Was this an outgoing Governor stealing an incoming Chancellor’s thunder?
With short term measures to help businesses deal with the Covid-19 consequences and others dealing with the environment, infrastructure, business taxes and addressing regional inequality the Spring budget covered them all.
The headline was a commitment to invest in infrastructure in support of the government’s commitment to ‘level up’ the economy by focusing investment on the Midlands and North: “over the next five years, we will invest more than £600bn pounds in our future prosperity”.
Many worries of SMEs were addressed by the £30bn package of short term measures to deal with the consequences of the Covid-19 epidemic.
They included abolishing business rates altogether for a year for small retailers with a rateable value below £51,000 extended to include museums, art galleries, and theatres, caravan parks and gyms, small hotels and B&Bs, sports clubs, night clubs, club houses and guest houses.
There was also a promise that business rates as a whole would be reviewed later in the year.
Any firm that is currently eligible for the small business rates relief will also be able to claim a £3,000 cash grant.
The Government will also cover up to 80% of a coronavirus loan scheme to cover the cost of salaries and bills and will offer loans of up to £1.2m to support small and medium sized businesses.
£2bn will be allocated to cover firms employing fewer than 250 people that lose out because staff are off sick with the cost of a business having to have someone off work for up to 14 days refunded.
The benefits rules will be relaxed to enable those who currently do not qualify for sick pay, such as the self-employed and gig economy workers, to claim benefits, which will also now be paid from day one of sickness.
Fuel duty was also frozen for a further year, but tax relief on red diesel will be removed over two years albeit with an exemption for farmers, rail and fishing.
In the longer term and over the five years of the parliament, the much-anticipated £170bn spending on improving the transport infrastructure and addressing the regional imbalance was also confirmed.
This will benefit the construction industry and is no doubt part of another statement: “Today, I’m announcing the biggest ever investment in strategic roads and motorway – over £27bn of tarmac. That will pay for work on over 20 connections to ports and airports, over 100 junctions, 4,000 miles of road.”
Similarly, the Chancellor confirmed that more than 750 staff from the Treasury and other departments will move to a campus in the north of England, as well as significant investment on R & D and that at least £800m will be invested in a new blue skies research agency, modelled on ARPA in the US.
Among a host of environmental initiatives, a new tax on plastic packaging is to be introduced, as well as freezing the levy on electricity and raising it on gas from April 2022.
Given the uncertain prospects for the UK’s economy, how many of the longer-term promises will be realised is likely to depend on the Government’s ability to borrow at unprecedentedly low rates so that it remains to be seen how much of the longer-term spending will actually happen.
It also remains to be seen how difficult the processes by which SMEs can claim help for Covid-19 related losses will be and whether the promise to review business rates as a whole will materialise.
The PR spin is already in place such as RBS’s claim today that it will provide £5bn of support for SMEs when in practice the small print refers to this as an extension to existing loan and overdraft facilities.
Notwithstanding any cynicism the Chancellor’s rhetoric was optimistic claiming his budget was aimed at “Creating jobs. Cutting taxes. Keeping the cost of living low. Investing in our NHS. Investing in our public services. Investing in ideas. Backing business. Protecting our environment. Building roads. Building railways. Building colleges. Building houses. Building our Union.”

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Cash Flow & Forecasting Debt Collection & Credit Management Finance Insolvency

Late Payments putting even more pressure on SMEs in 2020

late payments penalty?The amount owed to UK SMEs in late payments had allegedly risen to £50bn in early January according to research by digital banking platform Tide as reported by CityAM.
It has calculated that the average UK SME is chasing five outstanding invoices at once, wasting an hour and a half every day.
Data from Pay UK, which runs the Bacs Direct Credit and Direct Debit payment services, later in the month revealed that late payments had reached a four-year high last year at £23bn.
Tide’s new £50bn total was considerably higher than Pay UK’s total of £23bn owed to SMEs and I cannot reconcile the two figures.  The Tide research was conducted by Atomik Research among 1,002 SME decision makers from the UK and, it appears, judging by a footnote to the Tide report, that its £50bn figure may have been estimated on the basis of a total of 5.9 million SMEs, as calculated by The Department for Business .
However, the situation puts immense pressure on SMEs, with some having had to resort to overdrafts, cutting their own salaries and personal loans to pay bills because their own are being paid late. This is highlighted by Paul Horlock, chief executive of Pay.UK who has said that for the first time their research has revealed the human cost in stress and anxiety to SME owners.
Rashmi Dube of legal practice Legatus Law and former director of TMA UK wrote in the Yorkshire Post that a third of payments to the SME sector are late, leaving 37% with cashflow difficulties, 30% forced into an overdraft and 20% suffering a slowdown in profits, with considerable knock-on effects to employees as well as business owners.
In an attempt to ensure the Government promises to strengthen the regime tackling late payments, the Labour peer, Lord Mendelsohn, introduced a private members bill in the Lords, aims to bring in fines for persistent late payers, shorten the deadline by which clients must pay suppliers from 60 to 30 days and force all companies with more than 250 staff to comply with the Prompt Payment Code.
Although Private Members’ Bills from the Lords are not generally debated in the Commons the move serves as a reminder to the Government of promises it has made.
Prior to the December election a wider package of reforms had been promised, including improved resources and increased powers, a tougher Prompt Payment Code and Audit Committees’ oversight of payment practices.
One of these promises has at least been kept in part, with the appointment of Philip King as interim Small Business Commissioner following the sacking of Paul Uppal last November over an alleged conflict of interest and pending the appointment of a permanent replacement.
Mr King, who was previously chief executive of the Chartered Institute of Credit Management (CICM), which was responsible for running the Prompt Payment Code, is transferring the administration of the Code to his new office, fulfilling the commitment made by government in June last year to bring late payments measures under one umbrella. This is a useful measure as the  CICM was focused on training income and mainly funded by large companies. Following the move, we can expect to see the naming and shaming of those large companies who withhold payment to their suppliers, many of them SMEs.
Meanwhile In February, another 11 large businesses have been suspended from the Prompt Payment Code for failing to pay suppliers on time. They include BAE Systems (Operations) Limited, Leonardo MW Limited, and Smiths Detection.
However, for many SMEs the wait, in my view, for tougher and more effective powers with real bite beyond the current regime of naming and shaming has been far too long. How many have been forced to give up the unequal struggle in the meantime and fallen into insolvency?
 

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Banks, Lenders & Investors Cash Flow & Forecasting Finance Insolvency Turnaround

Running out of cash – crisis management, the first step in dealing with a cash crisis

crisis management when running out of cashCrisis management when a company is in financial difficulties is about quelling the understandable panic and taking a long, hard look at managing the business’ cash flow and the potential for action that makes the business viable.
Running out of cash is the cause of most business failures where the cash flow test of insolvency applies such that a company is insolvent if it is unable to meet its liabilities as and when they fall due. This doesn’t mean the business should be closed down but it does mean the directors should take clear steps to deal with the financial situation.
The first thing directors need to appreciate is that their primary consideration is to protect the interests of creditors rather than that of shareholders. This is where an insolvency or turnaround professional as an outsider can help by bringing an objective assessment of the personal risk when making decisions and the prospects that turnaround initiatives can be taken to restore the business to solvency.
Initial action by experienced turnaround professionals will focus on the short term cash flow while at the same time they will consider the medium and long term prospects for the business and whether the business model works or needs to be changed. This may be contrary to insolvency professionals who may be interested in justifying their appointment under a formal insolvency procedure.
Any review by professionals will consider how financial situation developed where it often the case that over time creditors have been stretched. Indeed, there are many reasons for the shortage of cash that often leads to a delay in paying suppliers whether this is due to a decline in sales, poor debt collection, bad debts, inadequate credit control, over trading, over stocking, funding investments and growth that doesn’t translate into sales or indeed myriad other reasons.
Guidance from the ICAEW (The Institute of Chartered Accountants in England and Wales) is that at this stage:
Getting cost controls properly in place, insisting all purchases (however small) are signed off centrally by the managing director or finance director, chasing harder to collect outstanding debts, or agreeing new payment terms with creditors can have a quick impact and help ease an immediate crisis.
The most likely immediate priority in managing a liquidity crisis is reducing costs while maximising income.
So, the first step in managing cash is to construct a 13-week cash flow forecast to help identify risks and actions that can be taken to reduce them. It should include income from sales and other receipts and outgoings, both to ongoing obligations such as rent wages and finance and to creditors.
The business also needs to control cash on a daily basis, with payments made on a priority basis with purchases approved by an authorised person who is aware of their impact on cash flow.
This will avoid the risk of returned cheques. It is also advisable to talk to the bank and keep it aware of what is being done to keep things under control.
This is the first step in crisis management when a company is having financial difficulties, but thereafter a restructuring adviser can be invaluable in taking a long, hard look at the business operations, its processes and its business plan to identify areas where performance is weak or unprofitable and whether and how the company can be returned to profitability if these elements are removed.
Getting external and objective help is likely to be necessary and my guide to running a business in financial difficulties is a useful reference.

Categories
Banks, Lenders & Investors Insolvency Liquidation, Pre-Packs & Phoenix Rescue, Restructuring & Recovery

Directors’ duties and liabilities survive insolvency – a new court ruling

directors' dutiesA recent High Court ruling on directors’ duties after insolvency has said that they cannot buy assets from their liquidated companies at below market value.
The ruling was made after solicitors for the company’s second liquidator who took over the case, Stephen Hunt, argued that Brian Michie as former owner and director of the construction company, System Building Services Group Ltd, had “unfairly bought a two-bedroom house from the original insolvency practitioner involved for £75,000 less than it was worth, 18 months after his company went out of business”.
The company went into administration in July 2012, and then into a creditors’ voluntary liquidation in July 2013 following which Mr Michie bought the property in Billericay, that was owned by his company, for £120,000 in 2014 from the previous liquidator Gagen Sharma.
The case revolved around whether director’s duties survived the insolvency of a company and specifically those relating to the purchase of assets post insolvency.
Directors have specific obligations where a company becomes insolvent. Under the Insolvency Act 1986 (IA 86), they must act to minimise further potential loss to creditors. Under the Insolvency Act 1986, the directors must recognise their duty to the company’s creditors, including current, future and contingent creditors.
While the case did not involve a pre-pack, where the business and assets of an insolvent company are sold by its Administrator to a new company, in this case the assets were sold by an insolvency practitioners back to the director and it has implications for such a sale since it was argued that the director knew the real value of the assets and knowingly bought them for less than what they were worth known as a ‘sale at undervalue’ which is a breach of the IA86.
Mr Hunt has been quoted as saying that: “This wasn’t a pre-pack case in the normal sense, but it was a predetermined sale of assets back to the director through a company that the insolvency practitioner assisted in forming.
“The moral case for pre-pack sales to directors has often been questioned, but this decision opens up the possibility of a clear legal difference between a third-party sale and one to the existing owners.”
I would strongly advise company directors to familiarise themselves thoroughly with their duties and liabilities.
You can download a copy of my Guide to Directors Duties here.

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Banks, Lenders & Investors Cash Flow & Forecasting Finance Insolvency Turnaround

Dire insolvency figures for 2019 – and little respite in sight?

insolvency figures and lifebeltsThe final quarter insolvency figures for 2019 make grim reading, as does the regular Red Flag update from insolvency and recovery firm Begbies Traynor.
The main messages from the latest insolvency figures, published for Q4 2019 by the Insolvency Service at the end of January, were that in 2019 underlying company insolvencies increased to their highest annual level since 2013 driven by a by 8.2% increase in CVLs (Creditors’ Voluntary Liquidations) which were at their highest level since 2009 and by a 24.0% increase in administrations, their highest level since 2013.
Construction, the wholesale and retail trade and accommodation and food services suffered the most, as they had been doing all year.
Begbies Traynor’s Red Flag update published last week also piled on the misery, with findings that a record 494,000 UK businesses are now in ‘significant financial distress’ with property, support services, construction and retail businesses suffering the most. These figures were the highest-ever since the company began reporting its Red Flag research 16 years ago.
Julie Palmer, partner at Begbies Traynor, said: “Currently, we do not know if the failing performance within some sectors is due to short term confidence issues, or more fundamental economic and structural issues.”
But, arguably, the worst insolvency figures could yet be to come.

Bellicose politicians and European stagnation

On Friday night the UK formally left the EU. While this has established a level of political certainty, for business the economic uncertainty continues for at least ten months before our trading relationship with EU has been negotiated.
The negotiation timetable helps us know when we might have certainty about our trading relationship. The first being the end of June as the last day by which any extension to the 11 month transition period can be sought although as things stand the PM has ruled that out. Without an extension the deadline for a Brexit trade deal is the 26th November as the last date for it to be presented to the European Parliament if it is to be ratified by the end of the year.
Notwithstanding the uncertainty of its trading relationship with the EU, the UK can now begin negotiating its own trade deals with other countries.
But whoever heard of a trade deal being formalised so quickly?
Furthermore, this will all take place in the context of stalling economic growth in the EU, particularly in France and Germany as revealed last week:
“Gross domestic product (GDP) in the currency bloc rose by just 0.1% in the fourth quarter of 2019 from the previous quarter, according to the EU statistics agency Eurostat.”
Stock markets were also dropping dramatically, which has been attributed largely to the spread of Coronavirus that has led to a lockdown of much of China.
All this, without taking into account changing consumer behaviour and confidence, partly due to increasing debt levels and to environmental concerns. Perhaps, given the 6% annual increase in personal insolvency figures over 2018, now at its highest level since 2010, there is also a degree of job uncertainty. In retail, for example, almost 10,000 jobs have been lost since the start of the year and 57,000 went in 2019, according to the Retail Gazette.
The Prime Minister and foreign secretary, Dominic Raab, seem set on taking a very hard line ahead of negotiations with the EU. While there are some that take the view that in negotiations it is best to start off taking as hard a line as possible then softening as they progress, given that the remaining countries in the EU clearly have their own problems that they will be seeking to solve the words “rock and hard place” spring to mind.
So, there is a distinct possibility of a hard Brexit, one without a deal although message spin is likely. If this is the case then the uncertainty for business will continue beyond the end of the year until a new normal is established.
We therefore endorse the advice of Eleanor Temple, chair of R3 (the insolvency and recue industry body) in Yorkshire:
“These insolvency figures should be a wake-up call to any director of a company which is finding it hard going at the moment. Anyone in this position should look to take objective advice from a qualified, professional source, to decide the best path forward – and the earlier this is done, the better.”

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Banks, Lenders & Investors Cash Flow & Forecasting Insolvency Turnaround

Sector blog – The north of England and the future of the construction industry

construction industryThere is no doubt that the construction industry has been having a torrid time in the last couple of years, especially since the collapse of the contractor Carillion with debts of £1.5bn at the start of 2018.
The most recently published insolvency statistics, for the third quarter of 2019, showed a 55% increase in the number of companies falling into administration, continuing an upward trend that had been going on all year.
There is little doubt that the political uncertainty since the UK voted in June 2016 to leave the EU has been a contributory factor to the industry’s woes, which are compounded by a shortage of people with appropriate skills. The skills shortage in the construction industry and its reliance on labour, often as subcontractors, has for several years been mitigated by the use of EU labour, particularly from Poland, but this, too, has been disrupted in the aftermath of Brexit as attitudes to migrants have become less welcoming.
But there have also been knock-on effects from the collapse of Carillion, which are being attributed to the structure of the industry, where major contractors like Carillion were focused on winning projects and managing them, relying on subcontractors to carry not only the responsibility for doing the work but also for taking the financial risk based on exposure to fixed price contracts and poor payment terms.
Indeed, when they go bust there is little left for creditors which highlights the level of credit risk.

Is the situation for the construction industry about to change?

Now that the Election is over and that the Government has a solid majority, hopefully, it will focus on the many pressing domestic issues that had been overshadowed by Brexit, not least the economic imbalance between various UK regions and London.
Indeed, the Prime Minister has already been warned that unless more attention is paid to the North of England particularly, those voters who lent him their vote, they may well withdraw their support equally quickly if they don’t see tangible investment.
In late December and again this week there were some signs that the message had been received and understood.
The Prime Minister had already promised that their trust in his government would be repaid and both The Times and the BBC were reporting that there was the prospect of changes to Treasury rules coming that would allow more cash to be allocated to projects outside of London and the South East, notably on infrastructure, business development projects and schemes like free ports.
Then, on Tuesday, when March 11th was announced as the date for the Chancellor’s first budget, the predictions of Treasury changes were again emphasised:
“In the intervening two months, the Treasury will have to work up a new National Infrastructure strategy that delivers on the plan to rebalance regional inequalities, some of which stem from decisions made nationally on, for example, transport spending.”
While doubts have been raised about the viability of the proposed HS2 rail project to connect London to the North, said to be likely to cost almost three times more than predicted, should this radical rethinking of Treasury rules come to pass, hopefully it could open up opportunities for the construction industry to work on plenty of other big projects in the North and possibly also the Midlands.
The other area that is likely to benefit the industry is a massive house building initiative. While no policies have been announced, Dominic Cummings’ Alternative Civil Service may light a bonfire under planning restrictions that are often blamed as the impediment to achieving previous governments’ targets. I am also sure we shall see more financial stimulus aimed at new owners, again all initiatives that will benefit the industry irrespective of what happens to the economy.

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Accounting & Bookkeeping Cash Flow & Forecasting Finance Insolvency

Update – sacked Small Business Commissioner speaks out

Small Business Commissioner sacked - for telling the truth?The now-ex Small Business Commissioner, Paul Uppal, has accused the Government of thwarting attempts to help SMEs tackle the late payment scourge.
Mr Uppal has reportedly blamed Whitehall for pushing him out of a role which, he says, is under-resourced and ignored by government.
He said that his office was met with “radio silence” from civil servants and ministers over his approach to the job and that his budget was too small to tackle the “huge task” of getting big companies to pay small businesses on time.
He also revealed a little more detail about the reason for his sacking, which was “a disagreement over an alleged conflict of interest related to an unpaid, interim advisory role in another government-backed small business scheme”.
The Times, is the only national broadsheet to cover the story, although it has been picked up by the online publication smallbusiness.co.uk.
It seems that The Times is becoming the champion of SMEs, carrying another article on the same day about a poll from the Chartered Institute of Procurement & Supply (CIPS) that found that almost one in six businesses said most payments are settled late. Malcolm Harrison, chief executive of CIPS, said there was a “rotten culture” of late payment. The organisation has been calling for big businesses that are slow to settle invoices to be barred from public sector work.
Another poll out this week from Xero, the online accountancy platform, revealed that a quarter of small business owners believe their company will go bust within 5 years, with 54% warning that late payments posed a risk to their firm.
The FSB (Federation of Small Businesses) has repeatedly said that late payment is the cause of an estimated 50,000 small businesses go under each year because of “pernicious” late payment. This figure might be questioned given that there were 17,454 formal company insolvencies in 2018 however I accept a liberal interpretation to allow for sole traders and companies ceasing to trade.

Does the Government care about or understand the pressures on SMEs?

According to research from the Department for Business, Energy & Industrial Strategy, at the start of 2018 a massive 99.9% of the 5.7 million businesses in the UK are small or medium-size businesses (SMEs). Of these only 0.6% of businesses in the UK are classed at medium-sized businesses.
This arguably makes SMEs an essential contributor to the economy and the provision of jobs.
Yet there has been no word on the appointment of a replacement for Mr Uppal, since I reported in my blog on November 19 the Government’s statement: “An open recruitment campaign to appoint a new Small Business Commissioner will get started immediately.”
Allegedly Fiona Dickie, the Deputy Pubs Code Adjudicator, was to provide oversight in the Small Business Commissioner role until early November, pending the appointment of an interim commissioner.
However, there has been a deafening silence from her, the General Election notwithstanding.
It has to be asked why an unpaid, voluntary advisory role for Mr Uppal was deemed to be a conflict of interest with his official position?
I have asked previously and I repeat my question: has the Government been successfully lobbied by some large corporates to roll back this initiative? Was he becoming too successful?

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Accounting & Bookkeeping Cash Flow & Forecasting Finance General Insolvency

After several high profile business failures – Is corporate governance robust enough?

corporate governance failuresand  penalties Research by a provider of audit, tax and consulting services has found that only 21% of board members think corporate governance is critical for a business to achieve success.
The findings by RSM also revealed that 96 per cent of company Board members it surveyed expected to see an increase in the number of criminal prosecutions of those senior executives and organisations implicated for poor risk management.
The issue of corporate governance has been under review by the FRC (Financial Reporting Council) for some time following high-profile collapses of businesses like BHS, Patisserie Valerie, Carillion and most recently Thomas Cook.
In its most recent annual report, the FRC found that that “audit quality is still not consistently reaching the necessary high standards expected”.
More than a year ago, a review of the FRC itself led by Sir John Kingman proposed the establishment of a new regulator, the Audit, Reporting and Governance Authority, but this was not acted upon by the Government before business was suspended pending the outcome of the forthcoming general election.
Concerns about corporate governance have also been raised by a Government committee, the business, energy and industrial strategy select committee which has called on ministers to move faster to reform the audit profession, strengthen corporate governance and curb executive pay.
Among its findings were that “too often, audit teams appear prepared to accept what management tells them rather than questioning its plausibility and drawing on specialists to form their own view”.
Corporate Governance refers to the way in which companies are governed and to what purpose. It identifies who has power and accountability, and who makes decisions. It is meant to take account of the interests of not only the business but its shareholders and stakeholders.
In July 2018, the FRC revised its corporate governance code, which was to apply to the accounting periods beginning on or after 1 January 2019.
According to the FRC the new code was designed to focus “on the application of the Principles [Code] and reporting on outcomes achieved. For the Code’s Provisions, companies should disclose how they have complied with these or provide an explanation appropriate to their individual circumstances.”
Clearly, more robust measures are going to be needed if the RSM research findings are any indication of the attitudes of business directors to the idea of responsible corporate governance.
Interestingly the IoD (Institute of Directors) yesterday launched what it called its manifesto for the next government to restore trust in corporate Britain. It included a proposal for a new Public Service Corporation to restore trust in the outsourcing sector, reforms to the regulation of auditors and replacing the FRC with a new, stronger Audit, Reporting and Governance Authority.
Changing corporate behaviour is a challenge, especially when it is so entrenched, but there is nothing like the threat of criminal proceedings to focus a board of directors given that in law they are collectively responsible for the decisions, behaviour and actions of any one director. The role of non-execs is key.

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Banks, Lenders & Investors Cash Flow & Forecasting Finance General Insolvency Voluntary Arrangements - CVAs

Post-Christmas apocalypse for the retail sector?

retail, high street trading,As we head for its most crucial shopping period in the wake of Mothercare and Mamas & Papas collapsing into administration, I make no apologies for revisiting the UK’s retail sector.
Following last month’s Brexit Halloween deadline and with Black Friday, Cyber Monday and Christmas ahead of us retailers have reportedly stockpiled seasonal products earlier than usual but the consumer uncertainty remaining no one knows how much stock will remain unsold in the new year.
The Confederation of British Industry, the country’s leading business lobby group, said retailers’ stock levels compared with the volume of expected sales had risen to the highest point in October since it began compiling retail sales estimates in 1983.
This is against a backdrop of dramatically narrowing profit margins, falling consumer confidence and repeated demands for comprehensive reform of business rates falling on seemingly deaf Government ears.
A new report by the global professional services firm Alvarez & Marsal (A&M), in partnership with Retail Economics, has found that store-based profit margins for the top 150 UK.retailers have more than halved in less than a decade – dropping from 8.8 percent as seen in 2009/10 to 4.1 percent in 2017/18.
This, it says, is the result of increasing operating costs, inflexible lease structures and changing shopping habits. Yet, it concludes that there is still demand for the High Street physical retail experience “presenting opportunities for forward-thinking incumbents, entrepreneurs and investors. Those that collaborate with landlords and local authorities will be the big winners going into the next business cycle”.
But with a December 25th Quarter Day deadline for the payment of quarterly rents, cash flow is likely to be tight for many retailers who won’t get much support from landlords.
Indeed, headwinds are building up for retail landlords in the retail sector such as Intu, the shopping centre owner, which has warned that it will have to raise more money from shareholders.  It has said that its rental income has been battered by a wave of controversial retailer restructures, by such retailers as Monsoon and Arcadia, using CVAs (Company Voluntary Arrangements) to negotiate rent reductions.
In addition to rent, rates are also an ongoing problem for retailers. On October 30th the Treasury Committee, a cross-party group of MPs, called for an urgent review of the whole business rates system, saying that it was broken, having outpaced inflation for many years and grown as a share of business taxes, placing an unfair burden on bricks and mortar shops. Not only that, but, it also criticised a backlog of 16,000 appeals against business rate decisions and called for the government’s valuation office to be properly staffed.
This was only the latest in a seemingly endless series of calls for reform, that had come from such bodies as the FSB (Federation of Small Businesses), the British Retail Consortium and others throughout the year, with FSB chairman Mike Cherry warning of a very bleak winter ahead.
With consumer confidence currently at a six-year low according to research by YouGov and the Centre for Economics and Business Research Mr Cherry’s prediction isn’t a surprise.
With an estimated 85,000 jobs having already gone from the retail sector over the last year, and approaching 3,000 more coming after the latest retail closures how likely is it that consumers will rush out and spend during the festive season?
The likelihood of any Government action has, of course, receded into the distance given that politicians are now not sitting, but out on the campaign trail ahead of a General Election on December 12th.
Whether a new government can shift its focus away from the ongoing and ever more tedious Brexit saga and onto more pressing domestic concerns remains a very big question but the party manifestos focus on sectors other than the retail sector which doesn’t bode well for them in the short term.

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Business Development & Marketing Cash Flow & Forecasting Finance General Insolvency

Diversity of thought is about more than challenging stereotypes and ticking a box

diversity of thoughtToo often the word diversity as applied to directors of companies is seen as demonstrating representation by gender, ethnicity, religion, and possibly of age. But it should actually be about more than that, it should also be about diversity of thought and ideas.
The challenges facing businesses in the 21st Century are becoming more complex and happening at a faster pace so it makes sense to have people at board level who think differently and can communicate their ideas.
In a recent survey carried out by Social Mobility Pledge as reported by The Times newspaper, the researchers found that by and large “who you know” was still the most important factor when promoting staff.
Sadly, the inference from this is that recruitment tends to favour like-minded people, which is hardly helpful to businesses wanting to avoid being stuck in a rut.
The ability to challenge the status quo at all levels and in particular a board level was a topic discussed in a recent vimeo by Kenneth McKellar, a partner at AGM Transitions, which advises senior executives on their career transitions and roles.
He argues that every business needs people who can challenge the organisation and this means choosing directors from a wide variety of backgrounds, education and disciplines as being more important than simply having more women on the board which seems to be the focus of most FTSE 100 companies seeking to observe the UK Corporate Governance Code.
Being open to people from different educational backgrounds and with different experiences can bring different ways of thinking, different knowledge bases and different perspectives to problem-solving.
The challenge for boards is to avoid groupthink despite the natural desire among teams to seek harmony and conformity since groupthink can lead to irrational and dysfunctional decision-making.
This is also about people’s preferred ways of thinking as shown in the Hermann Whole Brain ® Model which was the result of research originally conducted at GE’s corporate university, Crotonville.
It describes four main modes of thinking, analytical, organized, interpersonal and strategic, each of which has a value in promoting diversity of thought in the workplace and at board level. Of course, this is likely to lead to differences of opinion which might imply conflict. However, such differences ought to be regarded as healthy if a business is to consider the challenges of the future and continuously change to meet them.
Ultimately businesses need people who represent a range of thinking and of ideas with the ability to think laterally, who can disagree in a way that leads to collective decisions.
‘Yes’ men and women may keep their job but they ultimately they contribute to the decline of their business due to their going along with others instead of contributing in a constructive way that improves the decisions made.

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Cash Flow & Forecasting Finance Insolvency Rescue, Restructuring & Recovery

A rise in Administrations in Q3 indicates that many businesses are just about hanging on

Administrations rise and businesses just hanging onThe newly-published insolvency figures for Q3 (July to September) show a massive increase in the number of businesses entering Administrations.
A mid-October report by Begbies Traynor reported that the number of British businesses in significant financial distress has risen by 40% since the Brexit vote – with those in the property, construction, retail and the travel sectors the hardest hit and 489,000 companies in significant distress up by 22,000 on this time last year.
This was followed by KPMG’s recent analysis of London Gazette notices of companies entering into Administration and the picture became clearer with yesterday’s statistics from the Insolvency Service.
Administrations increased by 20% in the last quarter, compared to the previous quarter, to reach their highest level since Q1 2014. CVLs (Company Voluntary Liquidations) rose by only 2.3% compared to the previous quarter but were still at their highest quarterly level since Q1 2012.
The category with most insolvencies was Accommodation and Food Services. This would suggest that dining out seems to have fallen out of favour with consumers increasingly ordering meals to be delivered and eaten at home. This was becoming apparent based on the frequency with which I have been reporting restaurant failures over the last year but is confirmed by the stats that show Food Services have come top of the insolvency list. Meanwhile the Construction Industry continues to struggle with the highest number of insolvencies over the last 12 months to the end of Q3 2019.
Notwithstanding changes in consumer behaviour and the plight of builders, there has been a steady rise in the number of insolvencies over the last two quarters which is no surprise given the ongoing economic uncertainty due to world trade, US sanctions and the Brexit farrago. Meanwhile investors and businesses remain understandably wary about planning for growth – or even planning for future trading given the level of uncertainty and lack of prospects for many businesses. All this is against a backdrop of a weakening of the global economy.
Therefore, just hanging on is often the only option for many businesses who simply want to survive rather than plan for growth where the alternative is insolvency, often via Administration.
The Insolvency Service defines Administrations’ purpose as “the rescue of companies as a going concern, or if this is not possible, then to obtain a better result for creditors than would be likely if the company were to be wound up”. All too often Administrations end up as Liquidations following a sale of the assets with companies rarely ever surviving Administration.
K2 is in the business of helping companies to survive and restructure and has several guides to help when they are in difficulties.
If you would like to know more about your duties and responsibilities as the director of a company, with particular emphasis on knowing if your company is insolvent and what to do if it, you can download the Guide to Directors Duties here.
https://www.onlineturnaroundguru.com/Directors-duties
 

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Banks, Lenders & Investors Finance General Insolvency

Investors now putting environmental concerns first

environmental concernsThe UK’s largest investors put environmental concerns and corporate governance issues as top of their lists when considering companies in which to invest, according to research by EY.
However, the respondents awarded a “could do better” to such areas as audit, corporate reporting, trust, and reputation, according to a report on the research published by CityAM.
Clearly the activities of campaigners like Greta Thunberg and Extinction Rebellion have significantly raised awareness on environmental issues.
But the profile of environmental concerns is also being raised by the annual world summits on ethical finance, the most recent of which was held in Edinburgh in early September and was attended by senior representatives from more than 200 companies and organisations.
The summit is organised by the Global Ethical Finance Initiative, which oversees, organises and coordinates a series of programmes to promote finance for positive change.
In early October, Mark Carney, Governor of the BoE (Bank of England) warned that companies and industries that are not moving towards zero-carbon emissions will be punished by investors and go bankrupt.
But he also pointed out that “great fortunes could be made by those working to end greenhouse gas emissions with a big potential upside for the UK economy in particular”.
The Peer to Peer lending platform Lending Works says that Socially Responsible Lending (SRI) has risen up the investors’ agenda in the last five years and estimates that 79% of Generation Xers and 67% of Baby Boomers identify it as an issue of concern.
Identifying ethical investments depends on positive and negative screening by investment funds. Negative screening by fund managers excludes certain activities, such as fossil fuels, alcohol, intensive farming etc from investment, while in positive screening fund managers actively seek out opportunities that contribute positively to environmental concerns such as organic farming, green energy, and public housing.
This research can be tricky for investors to access independently and the advice is to use a financial adviser well versed in ethical funding, and also as ever, to remember that the value of shares and investments can go down as well as up.
But it is encouraging that environmental concerns have risen to the top of the investor agenda.
 

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Banks, Lenders & Investors Business Development & Marketing Cash Flow & Forecasting Finance Insolvency

Directors of companies in financial difficulties should be aware of their pay and perks!

executive pay and perks under scrutinyExecutive pay and perks have been creeping up the agenda with politicians and the public increasingly questioning the rewards given to top CEOs when companies fail.
But should this be done well before any potential failure and in particular when highly paid executives are seeking support for the restructuring and reorganisation initiatives that is necessary when their company is in financial difficulties?
Leadership involves setting an example and when the chips are down this means making demonstrable self-sacrifices.
This week, the Financial Times reported that Standard Chartered bank CEO Bill Winters may have his total pay cut and Namal Nawana will be leaving his CEO role at Smith & Nephew after less than a year after investors turned down his request to increase his $6m package to nearer $18m-$20m.
But it is not only executive pay that has come under fire, this is also true of pensions and other executive benefits.
In September the influential investor group IA (The Investment Association), told companies they must publish credible action plans that align executive pension pay with their workforce by 2022, or risk further shareholder revolts.
A Guardian report revealed that the IA, which represents City firms with £7.7tn in assets under management, has warned that it will “slap companies’ annual reports with a “red top” or highest possible warning label if they fail to share concrete action plans to align executive pension pay with the majority of staff and continue to offer top bosses retirement benefits worth over 25% of salary”.
Clearly shareholders are becoming less willing to support the “greed is good” philosophy that grew out of the Chicago School economist Milton Friedman’s Neoliberal economic model whereby businesses exist solely to make money for their shareholders and executives should be rewarded accordingly.
How much of this is due to external pressures, such as the growing awareness that perpetual growth is incompatible with a sustainable environment, and how much to a seemingly endless series of high profile business collapses, from Carillion to Thomas Cook with massive debts but still high executive pay and perks?
Are CEOs worth their executive pay and perks?
The CIPD (Chartered Institute of Personnel Development) monitors the gap between average CEO pay and that of workers.
Its most recent report found that average salaries for chief executives fell by 13% between 2017 and 2018, but they still earned 117 times more than the average UK full-time worker, despite the introduction of new standards for corporate governance and the introduction of the Audit, Reporting and Governance Authority by the Government earlier in the year
The argument has always been that in order to attract the best a business has to pay for talent, but beyond their annual reports, there is little or no guidance, or seemingly effort, made to monitor effectiveness or track improvements in profitability following the appointment of new CEOs.
In the most recent example, the death of travel company Thomas Cook, only now are questions being asked about the high remuneration of its CEO and executives when contrasted with its massive accumulated debt, and about the wisdom of turning down offers for lucrative parts of the business that might have made a difference.
At a recent event, moreover, Charles Cotton, CIPD senior adviser for performance and reward, said employers risked sending the message that executives’ contributions were “valued more highly” if their pay was rising when employee salaries had remained largely stagnant since 2008.
Clearly, there is a need for much more awareness among executive about the messages their pay and perks convey to stakeholders. The level of scrutiny they are being subjected to will only increase.

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Banks, Lenders & Investors Cash Flow & Forecasting Finance Insolvency Turnaround

Is the death of Thomas Cook a sign of more to come in the travel industry?

travel industry in trouble?Commentators have been quick to predict the death of the package holiday and in some cases of much of the travel industry following the demise of Thomas Cook in September.
But is this really the case?
Johan Lundgren, the chief executive of easyJet, argues that it is too soon to predict the demise of the travel industry, or indeed of package holidays.
In an article in the Daily Telegraph he says: “sales of holiday packages have grown faster than the economy every year for the past 10 years”.
There is no doubt, however, that technology has made a significant difference to the way people search, book and pay for their holidays.
Lundgren acknowledges that requirements and buying methods have changed significantly: “Rapid development in technology and AI, combined with a focus on data now allows the customer to find holidays suited to them online”.
Holiday companies, he said, needed to invest in technology to support customer interactions.
The tour operators trade body ABTA (Association of British Travel Agents) said 51% of people it surveyed in July had taken a package holiday in the past year, up from 48% in 2018.
According to statistics from the Office for National Statistics (ONS), the number of package holidays taken in the UK has been rising steadily since 2014, reaching 18.2m last year.
In its latest quarterly bulletin on overseas travel in general, published in September, the ONS results found that UK residents spent £4.5 billion on visits overseas in June 2019 (1% more than in June 2018), however, they made 6.8 million visits overseas in June 2019 (7% fewer than in June 2018).
There are also plenty of successful small, independent local travel agents offering tailored packages to fit customers’ requirements. We know of at least three in Suffolk alone and there are doubtless many more around the country.
So clearly once people have decided where they want to go and what they want to do, they still feel the need for someone to take care of the details and to have the assurance of having someone available should things go wrong.
Furthermore, the price paid by consumers and amount received by holiday providers might provide a clue to why travel operators and package travel companies ought to survive. Most online purchases, in particular for accommodation, are now handled by firms like booking.com, trivago.co.uk or tripadvisor.co.uk who charge hotels up to 30% of the package. This is a huge margin for travel companies to exploit.
So, what happened to Thomas Cook?
The company was launched in 1841 by a Derbyshire preacher, Thomas Cook, and became one of the world’s biggest companies to offer “integrated holidays” (ie package holidays).
The company issued two profits warnings in 2018 and in May revealed it was carrying huge amounts of debt – around £1.2bn. According to the Financial Times, many of its wounds were self-inflicted: “Successive managements allowed debts to balloon. The company revealed a debt pile of £1.2bn in May and recorded a £1.1bn write-down from its ill-fated acquisition of MyTravel, a UK rival. About one-third of Thomas Cook’s sales was spent just on servicing its loans”.
Generous remuneration to its executives, including an estimated £20m in bonuses and payment of more than £8m over the past five years to chief executive, Peter Fankhauser, have also been cited as excessive.
The company also received, and declined, five offers for its profitable airline operation and as if that were not enough, the FCA (Financial Conduct Authority) is investigating EY’s audit of the company’s accounts.
The German international broadcaster, Deutsche Welle, has speculated that opaque private equity deals amid low interest rates may also have played a part in its collapse.
Arguably an out-dated business model depending too much on high street retail outlets and a failure to adopt modern technology will have contributed too.
But while there will undoubtedly be casualties among travel firms that fail to adapt their business models and practices to modern consumer requirements, and, of course, the whole industry is vulnerable to the volatility of consumer confidence in the context of an eventual post-Brexit future with fears about job security, it would be unwise to predict the death of the travel industry as a result.
 

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Banks, Lenders & Investors Cash Flow & Forecasting Finance Insolvency

‘Caveat Emptor’ Is peer to peer lending too risky for peers?

peer to peer lending house of cardsPeer to peer lending (P2P) enables individuals to obtain loans directly from other individuals, cutting out the financial institution as the middleman.
As such, the lack of trust in middlemen has seen the emergence of peer to peer lending platforms as an attractive proposition for retail investors in a climate of low interest rates because they can offer better rates thanks to the lower overheads associated with online businesses. The lower overheads are also related to not having to pay a middleman!
The platforms are generally a website or app that facilitates this alternate method of financing, where the first emerged in 2005 and was brought under FCA (Financial Conduct Authority) regulation in 2014.
However, the FCA has been criticised as being too “light touch” in its oversight following the collapse in May this year of UK property finance peer to peer firm Lendy with £160m in outstanding loans of which it has been calculated more than £90m are in default.
According to CityAM, Lendy was placed on a FCA watchlist last year amid concerns about its inability to meet the standards required of regulated firms. Its subsequent failure is believed likely to result in retail investors losing £millions.
The demise of Lendy came a year after the peer to peer platform Collateral UK went into administration, reportedly, according to the website crowd funder insider, after it was discovered that it had wrongly believed it was authorized and regulated by the FCA under interim permission.
FCA chief Andrew Bailey has been reported as saying that the decision to authorise Lendy had been taken to reduce consumer harm, as refusing authorisation may have risked greater damage.
However, Adam Bunch of the Lendy Action Group, which claims to represent about 900 investors, said: “FCA authorisation was seen by investors as a stamp of credibility. Only now, after the platform has failed, do we learn that the regulator in fact saw authorisation as a way to contain a badly run business”.
I would add that the reference to ‘investors’ worries me since there seems to be no distinction between shareholders, secured lenders and unsecured lenders nor any understanding of ‘caveat emptor’.
Indeed, Lendy was a lending platform and there is no mention of the peers as retail lenders who have a prior ranking claim over investors (shareholders) but I am sure it highlights the ignorance among retail investors and lenders who might be better off seeking advice from professionally qualified middlemen.
Not surprisingly, there have been growing calls for tighter FCA regulation of peer to peer lenders and in June, following consultations, the FCA launched new, tighter regulations, most of which will come into effect in December this year.
They include introducing more explicit requirements to clarify what governance arrangements, systems and controls platforms need to have in place to support the outcomes they advertise and a requirement that an appropriateness assessment (to assess an investor’s knowledge and experience of P2P investments) be undertaken, where no advice has been given to the investors and lenders.
In September the FCA also warned peer to peer lenders to clean up poor practices or face a “strong and rapid” crackdown.
Whether this will be enough to stem the reported exodus of investors’ money from peer to peer lending and to better protect them remains to be seen.
However, the warning to potential investors remains as it has always been to not invest any money you can’t afford to lose.

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Banks, Lenders & Investors Cash Flow & Forecasting Finance Insolvency Rescue, Restructuring & Recovery

Sector update: have there been improvements in care home viability?

care home viabilityIt hardly seems any time since I last assessed the viability of the UK’s care home sector, but in the light of recent developments with one of the UK’s largest providers it’s time for an update.
The last blog in December 2018 focused on the implications of the collapse of Southern Cross in 2011. This time it has been prompted by reports this month that Four Seasons, Britain’s second-largest private care home provider with around 320 sites and 22,000 staff, has confirmed it has failed to pay rent on time. It is being seen as a negotiating tactic in order to cut bills, but is this really the case?
Its latest troubles began in 2017 when its owner Terra Firma was unable to pay interest on its debts, most of which are owned by private equity firm H/2 Capital Partners who took control and have overseen the group since then.
The business, which has more than £700 million in debts, appointed Alvarez & Marsal as administrators in April 2019. While the administrators have sought a buyer, it would seem most likely that H/2 will end up cherry picking the best homes and roll its debt into a new vehicle.
An estimated 70% of the care homes in England are small, mainly family-run businesses, while around 30% are owned by overseas investors, according to information published by the LSE in May this year.
In the LSE’s view many of the latter group of owners: “view them as assets for extracting large sums in the form of interest payments, rent and profit”.
In 2014 after the Southern Cross debacle the sector regulator CQC (Care Quality Commission) introduced a new requirement – a statement of financial viability, in a bid to ensure there were no repeats of the situation.
However, it clearly has not worked.
In August this year the insurance provider RMP published an assessment of the current state of care home viability, in which it quoted findings by Manchester University that “the financial models for nearly all the larger private equity-owned care home chains carry significant external debt and interest repayments”.
In addition, it said that spending by local authorities on social care had fallen while at the same time as costs have risen. This rise is attributed to a number of factors several of which are being related to Brexit: difficulties in staff recruitment and retention, restrictions on immigration numbers and, increases of the minimum wage.
Indeed, the GMB Union cites concern from the newly-published Operation Yellowhammer documents regarding the sector: “The adult social care market is already fragile due to declining financial viability of providers. An increase in inflation following EU exit would significantly impact adult social care providers due to increasing staff and support costs, and may lead to provider failure, with smaller providers impacted within 2 – 3 months and larger providers 4 – 6 months after exit”.
The Yellowhammer document, it says, therefore advises planning for potential closures and the handing back of contracts.
Despite these problems, demand outstrips supply in most local authorities, with an estimated current shortage of 65,000 care home beds, while a recent report by Newcastle University finds that an additional 71,000 care home spaces will be needed in the next eight years.
Clearly, funding the cost of care homes is itself in need of urgent attention and support. Call in the restructuring advisors?

Categories
Cash Flow & Forecasting Insolvency Rescue, Restructuring & Recovery Voluntary Arrangements - CVAs

High Court CVA clarification for landlords

High Court ruling for landlords on CVARecently in the High Court landlords challenged the validity of the CVA (Company Voluntary Arrangement) that was approved for the High Street Debenhams retail chain.
The store chain had announced that its restructuring plan based on the closure of 50 stores and rent reductions for up to 100 others.
Major shareholder Mike Ashley, owner of Sports Direct, had sought to challenge the CVA after the board of Debenhams rejected his offer to buy the chain for £200 million. His shareholding was wiped out when the company went private as part of the rescue and restructuring deal, which was approved by 80% of its landlords.
Although Ashley withdrew his own challenge to the CVA, he continued by backing a legal challenge from Combined Property Control Group (CPC) as landlords who owned several properties.
According to CMS Law the five grounds of the CPC challenge were:

  1. Future rent is not a “debt” and so the landlords are not creditors, such that the CVA cannot bind them;
  2. A CVA cannot operate to reduce rent payable under leases: it is automatically unfairly prejudicial;
  3. The right to forfeiture is a proprietary right that cannot be altered by a CVA;
  4. The CVA treats the landlords less favourably than other unsecured creditors without any proper justification;
  5. There is a material irregularity: the CVA fails to adequately disclose the existence of potential “claw back” claims in an administration.

Items 1, 2, 4 and 5 were rejected by the High Court, although item 3 was upheld, meaning that the landlord retains the right of re-entry and to forfeit a lease and therefore this right cannot be modified by a CVA.
This means that if they choose to, landlords can take back their property, although in the current perilous circumstances in the retail sector it is questionable if this would be in their interests given the difficulties they might have in finding an alternative tenant and their liability for rates even when the property is vacant.
The findings did however leave open the prospect of a challenge over the reduction in the rent value if it could be proven that it was below the current market value.
Given the growth in the use of CVAs to exit unwanted leases and reduce rent in the struggling High Street retail sector, the High Court judgement is to be welcomed, both for those retailers hoping to survive by restructuring their businesses onto a hopefully more sustainable footing by reducing their overheads, and for landlords, who now have some clarity about their position in such cases.

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Accounting & Bookkeeping Cash Flow & Forecasting Debt Collection & Credit Management Finance Insolvency

Can SMEs afford to wait any longer for a business rates review?

business rates review is urgent for businessesRetailers have been calling for months for a business rates review as the decimation of the UK’s High Street continues.
In early August more than 50 leading retailers wrote to the Chancellor urging him to change tax rules to boost the UK High Street and the business law firm RPC has reported that there has been a 65% increase in the number of businesses challenging their rates bill in the last quarter, with 4,000 challenges made in the first quarter of 2019, up from 2,430 challenges in Q4 2018.
RPC explains that the increase in challenges shows broadening dissatisfaction with business rates. Jeremy Drew, Co-Head of Retail at RPC, explains that the property tax is so complex that each new ratings review sees thousands of challenges lodged by businesses.
The retailers’ call was reinforced later in the month by the CBI (Confederation of British Industry), whose chief economist Rain Newton Smith said reform would be an enormous help to companies facing uncertainty and rising costs.
So, it is not only retail businesses that are struggling as new figures from an investigation by the real estate adviser Altus Group revealed earlier this week.
Using the Freedom of Information Act, it asked all the councils in England to provide details of how many business premises had been referred to Bailiffs.
It found that during the financial year 2018/19 councils appointed Bailiffs to visit 78,000 non-domestic properties including shops, restaurants, pubs and factories to collect overdue business rates.

What are the chances of a business rates review in the near future?

There are worries that in the light of politicians’ and Government’s ongoing tunnel-vision focus on Brexit urgent domestic concerns are being forgotten.
A total of 10 trade bodies have written to the Treasury Select Committee to express concern that the recent ministerial reshuffle has risked delaying urgent business rates reform.
Robert Hayton, head of UK business rates at Altus, said: “It’s not the mechanics of the rating system that is of primary concern to business but the level of the actual rates bills.”
“Commercial property is already making a significant contribution to overall UK tax revenues…with the highest property taxes across the EU…”
And John Webber, Head of Business Rates at commercial real estate advisers Colliers International, has said that a Government promise to carry out business rates reviews every three years, rather than every five, “ will merely scrape the surface of a current business rates system that needs much more drastic reform”.
This includes a revamped appeals system, which has been made so complicated that at first SMEs were deterred from using it. Also, a lack of staff at the VOA (Valuations Office Appeals), Colliers argues, has created an enormous backlog of appeals being settled.
The Times recently reported that the number of outstanding appeals has risen six-fold.
It is clear that if the UK economy, which relies heavily on SMEs, is to survive and thrive once Brexit is finally settled (if it ever is) the conditions in which they operate will have to be vastly improved, and quickly, if they are to be able to manage their cash flows, create sustainable business plans and grow in the future.
Perhaps the most urgent element of this is a business rates review given that the present system is far from fit for purpose.

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Banks, Lenders & Investors Business Development & Marketing Cash Flow & Forecasting Finance Insolvency

What is AIM and is it beneficial to SMEs to apply for AIM listing?

aim for growing businessIt is coming up to 25 years since AIM (Alternative Investments Market), the London Stock Exchange’s junior stock market, was launched and it now lists around 3,600 businesses.
According to the accounting firm BDO, “AIM is the most successful growth market of its type in the world” and in the last five years AIM-listed businesses “have created an additional 76% jobs, now employing almost 390,000 people”.
The London Stock Exchange website explains that AIM is targeted at smaller, and growing, businesses and offers them “the benefits of a world-class public market within a regulatory environment designed specifically to meet their needs”.
It is a multilateral trading facility, operated and regulated by the London Stock Exchange under FCA rules.
Candidates for AIM listing do not have to have a trading track record, but they must abide by the rules. There are very clear guidelines on how to apply for AIM listing on the Stock Exchange website.
They must appoint and maintain an AIM approved Nominated Advisor, also known as a NOMAD, who is responsible to the Exchange for assessing the appropriateness of an applicant for AIM. The NOMAD also advises and guides their client through the AIM listing process and once listed ensures it complies with its ongoing responsibilities.
The Stock Exchange will suspend trading of the company if it ceases to retain a nominated advisor and if a new NOMAD is not appointed within a month, its AIM listing is cancelled and its shares can no longer be publicly bought or sold.
Albeit with advice from a NOMAD, application for AIM listing is relatively straightforward but listing does cost an estimated £400,000 to £600,000 a year. This covers the NOMAD and other adviser and broker fees, plus AIM membership at around £100,000 per year, according to the website startups.co.uk.
Startups lists some of the pros and cons of AIM listing, the main advantage being future access to raising further funds after the IPO (Initial Public Offering). It says, “AIM listing is being seen as an increasingly attractive investment class to institutions such as pension funds”.
“It also raises the profile of a business, as does having Plc status”, it says. While Plc status requires a minimum of £50,000 share capital, AIM companies tend to have much more and there is the attraction of having publicly tradeable shares.
The downsides according to Startups, are not only the financial cost but also the difference between running a Plc as opposed to a privately-owned business, plus the business will be vulnerable to the ups and downs of share values.
I would add another downside, the need to make public disclosures about matters that influence the share price. This may be great when an AIM company is doing well but can be disastrous for one that isn’t, especially one that needs restructuring.

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Accounting & Bookkeeping Cash Flow & Forecasting Finance Insolvency

Late payments situation getting worse for some SMEs

late payments penalty?According to the ICAEW (Independent Chartered Accountants of England and Wales) late payments to SMEs are a bigger problem than they were a year ago.
Of the nine SME industries analysed, it said, six had reported that the problem of late payments was worsening.
The FSB (Federation of Small Businesses) too, has said that while there have been some improvements thanks to the efforts of the Small Business Commissioner Paul Uppal, late payments remain a major problem and research by Lloyds Bank Commercial released at the end of last month found that last year almost two thirds (62%) of SMEs that were being paid late “failed to chase up for fear of harming customer relationships” also cited time constraints as a significant factor.
The cost to small businesses has been considerable, according to research published by Hitachi Capital earlier this month. It estimates late payments have cost SMEs £51.5bn in the last year.
Its survey of 1000 businesses found that 31% have experienced late payments costing their business at least £10,000 in the last 12 months.
It said that 27% reported that late payments have hit profits, while 12% said the issue had forced them to defer pay to staff. Around 40% have had to use their own money to fund cash flow in their business, with 80% using personal savings to keep their business operational.
Mr Uppal has meanwhile continued to investigate SME complaints and published reports since I last provided an update on the situation.
In mid-July he suspended 18 companies from the Prompt Payment Code, including BT Plc, British American Tobacco and Centrica.
He investigated several complaints and has published reports naming and shaming the companies involved.
They included Bupa Insurance Services Ltd who had failed to pay an invoice for £29,403.76 on 2 November 2018 based on 45-day end of month payment terms. Payment was eventually made 30 days late on January 15 2019 after the SME and Mr Uppal had chased on several occasions.
Also named and shamed in separate reports were Zurich Insurance PLC which eventually paid a claim 65 days later than its agreed payment terms.
Another company, Sambro International failed to pay a small graphic design company within its promised 30 days, for two invoices submitted in November and December 2018. Eventually following Mr Uppal’s investigation, one was paid 56 days late and the second 23 days outside their contracted terms.
Clearly, Mr Uppal and the Chartered Institute of Credit Management (CICM), which administers the system of removal of businesses from the Prompt Payment Code are doing their best, but in the current uncertain economic climate SMEs have enough to worry about without this constant and relentless mistreatment by larger customers and it is well past time the Small Business Commissioner was given stronger powers of enforcement.

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County Court, Legal & Litigation Finance HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery

The change to HMRC preferential creditor status v emphasising insolvent business restructure

HMRC preferential creditor status at the head of the queueThe Government’s proposal to restore HMRC preferential creditor status when a business becomes insolvent is, in my view, at odds with its desire to shift the balance in the insolvency regime towards helping more businesses to survive.
In September 2018 I welcomed the Government’s newly-published proposed changes to the insolvency regime, whereby there would be a moratorium, initially 28 days, from filing papers with the courts to give still viable businesses more time to restructure or seek new investment to rescue their business free from creditor action. Consultation on this and other changes to the insolvency regime was begun in 2016.
This year, in the April 2019 budget statement, the then Chancellor Philip Hammond included a proposal to restore HMRC preferential creditor status, something that had been removed as part of the Enterprise Act in 2002.The new preferential status will apply to VAT, PAYE income tax, employee National Insurance contributions, student loan deductions and construction industry scheme deductions and will rank ahead of both the floating charge and unsecured creditors.
Draft legislation has now been published and subject to Parliamentary approval of the Autumn Budget is due to come into effect in April 2020. Although it will only apply to businesses becoming insolvent after that date, it will apply without limit to the relevant historic tax debts, without time limit or cap.
According to the ICAEW (Institute of Chartered Accountants in England and Wales) after a relatively short consultation period between 26 February 2019 to 27 May 2019 the draft legislation appears to take little account of the representations made: “This proposal ….can be expected to deter lending and have other adverse consequences that have not been sufficiently considered…”
Given the current political uncertainty and obsessive focus on Brexit it remains to be seen when and if the new legislation appears in the eventual Finance Bill and when approval would be expected.
Nevertheless, the implications of the restoration of HMRC as a preferential creditor have been widely criticised for the effect it is likely to have on lending, given that it moves the floating charge of secured lenders down the pecking order in terms of getting their money back.
Purbeck Insurance Services, for example, has warned small businesses that the risks of Personally Guaranteed finance facilities are likely to increase and as a consequence more Guarantors will have to pay out.
In addition to the impact on loans, HMRC jumping up the queue for payments will mean less money is left for trade suppliers as unsecured creditors in future insolvencies, no doubt resulting in more insolvencies.
As a turnaround adviser and investor, I agree entirely with the ICAEW: “This proposal is at odds with government efforts to foster an enterprise culture in recent years.”

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Banks, Lenders & Investors Finance Insolvency Turnaround

Q2 insolvencies offer no sign of economic storms easing

rising insolvencies indicate continued stormy ecoomic weatherThere are no signs of the pressures on businesses easing off as insolvencies in the second quarter of 2019 (April to June) continued to climb, according to the latest figures released by the Insolvency Service.
While the number of compulsory insolvencies fell, there was a significant increase in the number of CVLs (Company Voluntary Liquidations), which showed a 6.9% increase, an increase of 2.6% in the total numbers of insolvencies compared to the first quarter of the year.
Compared to the same quarter in 2018 the numbers of insolvencies have risen by 11.9%, the highest underlying rate of insolvencies since 2014 according to the Insolvency Service.
It reports that those businesses that have fared worst in the second quarter have been “the accommodation and food service industry with 74 extra cases compared to the 12 months ending Q1 2019 (an increase of 3.4%) and the construction industry with 37 additional insolvencies (a 1.2% increase)”.
The latest Red Flag Alert for the second quarter of 2019 from Begbies Traynor also emphasises an increase in businesses in “significant distress”, to 14% of all UK businesses while the average debt of insolvent companies has more than doubled – from £29,873 in 2016 to £66,226, it says.
Set this against a backdrop of a weakening global economy, as reported by the World Bank in June, in part thanks to business uncertainty because of international trade tensions.
In the UK context, the future for the economy remains completely unknown given the new Prime Minister’s Brexit strategy. This is evident from the factory output figures for July that reported the lowest levels for six years, slowing consumer borrowing, and this week the value of the £Sterling dropping to its lowest level for two years.
While low exchange rates may be a positive for UK businesses involved in exporting, making exported goods and services cheaper, they will also add to business costs on any supplies and materials imported from outside the country where the net result is that we are worse off given the UK trade deficit which was £30.8 billion in the 12 months to April 2018.  Another factor is consumers who are continuing to spend but may prefer to stay at home instead of having more expensive holidays abroad.
Given also the ominous noises about continued UK-based car manufacture, most recently from Ellesmere Port, depending on the post Brexit conditions here, not to mention the continued carnage in High Street retail, more people will also be worrying about their future job security.
It would be great to be able to say that the end is in sight but sadly, with so many “known unknowns” the economic weather outlook has to remain stormy.

Categories
Banks, Lenders & Investors Finance HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery Voluntary Arrangements - CVAs

Proposed HMRC preferential status a blow to financing and restructuring

HMRC preferential status could cause more CVA failures The Government last week published its new draft Finance Bill, which includes the proposal to restore HMRC preferential status as a creditor for distribution in insolvency. This was originally granted in the Insolvency Act 1986 but removed by the Enterprise Act 2002.
In summary, HMRC is currently an unsecured creditor ranking equally with suppliers as trade creditors and unsecured lenders for any pay-out to creditors from an insolvent company. The preference would mean they get paid ahead of unsecured creditors leaving less or nothing for most creditors whose support is necessary when restructuring a company.
There had already been considerable consternation expressed by insolvency practitioners and investors after Chancellor Philip Hammond announced the proposal in the Spring, but it seems the Government has decided to press on making only a light amendment to the effect that preferential status will not apply to insolvency proceedings commenced before 6 April 2020.
The change in HMRC to preferential status will apply to VAT and PAYE including taxes or amounts due to HMRC paid by employees or customers through a deduction by the business for example from wages or prices charged such as PAYE (including student loan repayments), Employee NICs and Construction Industry Scheme deductions.
It will remain an unsecured creditor for other taxes such as corporation tax and employer NIC contributions.
The consultation period for the Bill ends on 5 September 2019 and, not surprisingly, there have already been criticisms of the HMRC preferential status element of the bill, not least as reported in the National Law Review:
“Unfortunately for businesses and lenders, this does not address real concern about the impact of this change on existing facilities and future lending,” it says.
It points out that preferential debts are paid after fixed charges and the expenses of the insolvency but before those lenders holding floating charges and all other unsecured creditors.
Accountancy Age also reports on reactions from the Insolvency trade body R3’s president Duncan Swift, who described the Bill’s publication as “shooting first and asking questions later”.
He said: “This increases the risks of trading, lending and investing, and could harm access to finance, especially for SMEs. This means less money is available to fund business growth and business rescue, and, in the long term, could mean less tax income for HMRC from rescued or growing businesses. It’s a self-defeating policy.”
The article also includes comments from Andrew Tate, partner and head of restructuring at Kreston Reeves: “The introduction of this in April 2020 will be interesting,” said Kreston Reeves’ Tate. “The banks will have to change the criteria on which they base their lending to businesses in the light of this new threat, but will they also reassess the amounts they have lent to existing customers?

Is HMRC preferential status the death knell for CVAs?

CVAs (Company Voluntary Arrangements) have traditionally been the route whereby unsecured creditors could have some say, and receive an enhanced pay-out, when a business becomes insolvent and seeks to restructure its balance sheet in order to carry on trading and manage its debts.
Instigated by the directors, approval of a CVA requires 75% of unsecured creditors where the payment terms are binding on any dissenting creditors providing they are less than 25%. Generally, the earlier a business enters a CVA the better, although they can be used as a means of dealing with a minority creditor who has lodged a Winding Up Petition (WUP) in the courts.
CVAs generally involve a payment to creditors which must be distributed by creditor ranking where currently HMRC gets paid the same as trade creditors but under the proposals HMRC will be paid first, leaving considerably less for trade creditors whose support is needed as ongoing suppliers.
CVAs have been a valuable insolvency tool for saving struggling retailers, most recently Monsoon/Accessories, Arcadia (owned by Philip Green) and earlier Debenhams, Mothercare, Carpetright and New Look.
But there have been signs of creditors’ disenchantment with the CVA mechanism when used for retail chains, notably from landlords, who stand to lose significant revenue if they agree to reduce their rents as part of the CVA agreement.
Arcadia, in particular, struggled to reach agreement when landlord Intu, owner of several large shopping arcades, said it was not prepared to accept rent cuts averaging 40% across Arcadia Group shops in its centres. In the end the deal was agreed after landlords were promised a share of the profits during the CVA period. This is an example of the flexibility of CVAs and of how they can benefit creditors if a business is to be saved.
It is a dilemma for landlords in particular, but on the whole they seem to have come to the view that some revenue going forwards is better than none, given that there is reducing demand for High Street Retail space not least because of the sky-high business rates and dwindling footfall from shoppers.
However, it is very likely, in my view, that this latest move by the Government to restore HMRC preferential status, could just tip the balance in making the CVA ineffective as a restructuring tool since the lion’s share of available money will be paid to HMRC.

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Business Development & Marketing Cash Flow & Forecasting General Insolvency

June sector focus on the restaurant trade and changing eating habits

The restaurant trade is notoriously volatile at the best of times but the last two years have seen it undergoing a particularly torrid time.
Even by the standards of the recent decline in High Street retail the restaurant trade stands out.
By December 2018, according to a BBC report, “Gourmet Burger Kitchen [has] earmarked 17 sites for closure while Carluccios is shutting 34 outlets. Prezzo said it would close 94 – about a third of the chain – including all 33 outlets of its Tex-Mex brand Chimichanga.” Add to these burger brand Byron, and the French cuisine chain Cafe Rouge.
In all, according to the trade publication The Caterer, 1,123 restaurant businesses filed for insolvency in the first three-quarters of 2018 and the most recent Market Growth Monitor from CGA and Alix Partners reveals that the number of restaurants in the UK decreased by 2.8% in the year to March 2019.
The problem is highlighted by the experience of Jamie Oliver who in August 2018 closed 12 of his 37 Jamie’s Italian restaurants and made about 600 staff redundant in an attempt to save the rest of his business. It didn’t work as in May this year he announced the immediate closure of his restaurant group, including Barbecoa and Fifteen, with the loss of 1,000 jobs, leaving him with just three surviving restaurants.
The bulk of the insolvencies and closures has been among restaurant chains, of which arguably, there has been an oversupply.
Having said that, some chains are still surviving and expanding, notably Indian food chains Dishoom and Mowgli.
What is driving the contraction of the restaurant trade?
Of course, and inevitably, the backdrop to some of this is at least in part the still-unresolved issue of Brexit and when, if ever, the UK will finally leave the EU. This is arguably the undercurrent driving a significant drop in consumer spending and confidence in future job security despite current record employment levels.
Then there is the impact of high business rates, the minimum wage and rising ingredient costs and increasingly a shortage of staff, many of them from overseas and notoriously badly-paid, as more and more EU citizens return home either because conditions in their home countries have improved or out of a perception of the hostility towards them in the UK.
However, there is also arguably a shift in eating habits taking place.
It is partly a case of a desire for quality over quantity or a unique dining experience that has contributed to the survival of small, independent local artisanal restaurants, although if you speak to their owners, rent and business rates are a major issue.
It is also about an increased desire for more healthy, often locally-sourced food, the rise of vegan diets, and above all, it is about time and convenience. Increasingly, people are opting to eat in, either with their families or with friends and to order food online. With Deliveroo, Just Eat and Uber catering to this demand the traditional “dine out” restaurant trade faces an uphill struggle unless it can offer something unique as the small independent offering well-cooked, authentic, regional specialities can.

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Accounting & Bookkeeping Cash Flow & Forecasting Finance Insolvency

What is the future for company audits?

conducting company audits

In principle, company audits must be carried out on any public body, FCA regulated business and most companies unless they are exempt. The exemption threshold means a company must have at least 2 of the following: an annual turnover of no more than £10.2 million, assets worth no more than £5.1 million, 50 or fewer employees on average.

The audit industry has been under review for some time and this scrutiny has intensified since the collapse of Carillion the construction and outsourcing firm in early 2018.

The industry is dominated by the “Big Four”, Deloitte, EY, PwC and KPMG, who audit almost all of the FTSE 100 largest companies. Despite their dominance other accountants have also come under the spotlight such as Grant Thornton who were auditors of Patisserie Valerie that went bust recently, apparently due to a £40 million fraud.

Mr Dunckley, CEO of Grant Thornton told MPs on the business, energy and industrial strategy committee “we are not looking for fraud and we are not looking at the future and we are not giving a statement that the accounts are correct. We are saying they are reasonable, we are looking at the past, and we are not set up to look for fraud.” MPs were not impressed. Should they have picked up the fraud as part of their audit? What is their level of accountability for failing to spot the fraud?

One of the contentious issues raised has been a suspected conflict of interest between auditors’ auditing and consulting arms.

In 2018 PwC, was fined £6.5 billion for its “inadequate review” of now-defunct department store BHS’s books.

In April 2019 the FRC (Financial Reporting Council) fined KPMG £6m and “severely reprimanded” them, telling them to undertake an internal review over the way it audited an insurance company, Syndicate 218, in 2008-09.

And in May 2019 the FRC fined KPMG another £5m and again “severely reprimanded” them after they admitted misconduct over their 2009 audit of Co-operative Bank.

KPMG must be feeling the heat as it was also the auditor for Carillion, which collapsed with debts estimated £1.5bn.

Since the Carillion collapse the CMA (Competition and Markets Authority) has been investigating and announced its recommendations in April.

It concluded that there should be:

* A split between audit and advisory businesses, with separate management and accounts

* A mandatory “joint audit” system, with a Big Four and a non-Big Four firm working together on an audit

* Regulation of those appointing auditors

The CBI criticised the proposals saying they could add cost and complexity for business with no guarantee of better outcomes and could restrict access to the skills required to carry out complex audits.

For smaller businesses, including those below the exemption threshold, company audits can be an effective test of a company’s accounts and are a useful tool for directors in assessing their business’ health.

The worry is that the seemingly endless question marks, fines and “reprimands” issued to large firms and their presumed conflict of interest between earnings from consultancy and from audit work could undermine confidence in the audit function and in the many smaller accountancy practices that diligently carry out audits.

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Banks, Lenders & Investors Finance Insolvency Uncategorized

Are Internet unicorns another bubble destined to burst?

Reminiscent of the hubris leading up to the 2000 dot com crash, the start of this year there has seen a queue of internet unicorns lining up to launch on the stock market via Initial Public Offerings (IPOs).

A unicorn business is defined as a private, venture capital-backed firm worth over $1bn. Among those that have either launched IPOs or considering them are Lyft (launched in March), Uber (launched in early May), Pinterest, AirBnB and possibly We Work and Slack.

So far, the results have been distinctly underwhelming with Lyft’s shares valued at $72 each on debut, giving the seven year-old company and rival to Uber a market value of slightly more than $24bn.

Uber set its launch value at $90 billion (£70 billion) and listed share prices at $45 each. However, within hours on its first day of trading Uber’s share value had dropped by 7.6% down to $41.51.

Neither of the two ride-hailing businesses has so far ever made a profit.

Last year, despite boasting revenues of $11bn Uber made operating losses of $3bn and while its revenues grew from $343m to $2.1bn between 2016 and 2018, its losses also soared, from $682m to $911m.

The hubris might best be justified by the fact that We Work was valued at ~$20bn at last fundraising, despite last year losing ~$4bn. Contrast this with UK listed Regus that made ~€800m last year and is currently valued at ~$4bn.

There is no doubt that trading conditions in the last two years have been challenging, with a global economic downturn, trade wars and political populist movements all making markets more volatile.

This may be behind the incentive for unicorns to rush into IPOs before economies find themselves in recession. Again, readers might like to recall the market bubble ahead of the dot com crash in 2000 when Lastminute.com was the last of old “retail” internet firms to list before the crash with many of those who missed the boat subsequently falling by the wayside.

Are there more deep-seated problems with internet unicorns?

Ilya Strebulaev, professor of finance at Stanford University, has extensively researched private venture capital backed companies and come to the conclusion that unicorns are overvalued by about 50%.

Prof Strebulaev argues that typically venture capital-backed businesses make losses “because they basically sacrifice profits to achieve very high growth or scale” but the question is whether their business models will be sufficiently flexible to allow them to convert losses to profits over time.

The current crop of internet unicorns are significantly larger than the internet companies that were involved in the mid-1990s dot com bubble and 2000 crash but a lot depends on their plans for the future.

Lyft has plans for using the money generated from its IPO to invest in acquisitions and technology, including autonomous driving, for example.

Uber has already suffered from protests by its drivers over their treatment with stories rife of drivers earning so little that they have to sleep in their vehicles and with protests ongoing there are concerns that it would face significantly increased costs if forced by regulators to classify drivers as employees rather than contractors.

An item in its IPO prospectus is particularly telling “as we aim to reduce driver incentives to improve our financial performance, we expect driver dissatisfaction will generally increase.”

If these companies are pinning their hopes of future profitability on driverless cars and dispensing with drivers altogether they, and their investors may have a long wait.

Categories
Banks, Lenders & Investors Finance Insolvency Rescue, Restructuring & Recovery

Two examples that justify agility when pursuing a retail turnaround

retail turnaround to prevent extinctionThis blog contrasts the fortunes of Majestic Wines with those of Debenhams as arguably examples that show how retail business can survive a rapidly changing environment.
There have been efforts by many struggling High Street retailers to improve their businesses by using an insolvency mechanism called the CVA (Company Voluntary Arrangement).
The most recent of these is Debenhams, which, having secured £200 million in new loans in March and followed with a pre-pack administration sale in early April, effectively wiping out its shareholders including the vociferous Mike Ashley who also owns Sports Direct and BHS.
It was acquired by new owners, a consortium of banks and hedge funds, who almost immediately launched a major store closure programme ultimately to involve 50 stores, in conjunction with a CVA aimed at persuading landlords to reduce the rent for remaining stores by up to 50%.
Debenhams’ sales had dropped by 7.4% in the previous six months but it has been argued that the store chain’s problems were more deeply rooted in its dinosaur-like lack of adaptation to the change in consumer buying habits.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said: “As an investment, Debenhams is a tale of woe from start to finish.
“The strategy since float was out of kilter with the changing habits of consumers. But even before the float [in 2006], its private equity owners had put the department store under financial pressure, by selling off a number of freeholds in favour of leasing them back.
“Hindsight is a wonderful thing, but the road to Debenhams’ ruin has been paved with poor decisions, as well as a dramatic shift towards digital shopping.”
Richard Lim, chief executive of Retail Economics said: “We should not understate the significance of this collapse. Debenhams has fallen victim to crippling levels of debt, which has paralysed its ability to pivot towards a more digital and experience-led retail model.
“Put simply, the business has been outmanoeuvred by more nimble competitors, failed to embrace change and was left with a tiring proposition. The industry is evolving fast and it paid the ultimate price.”
By contrast, a restructure announced by Majestic Wines demonstrates a fine example of retail turnaround agility, where the key word is “pivot”.
In 2015 Majestic bought Naked Wines, a subscription-based online business founded in Norwich by entrepreneur Rowan Gormley in 2008, and appointed Gormley as its CEO.
In March this year, he announced plans to close 200 Majestic stores and to rename the company as Naked Wines. According to Majestic almost 45% of its business came from online with a further 20% from international sales.
The Majestic business model had been to locate its outlets on cheaper out-of-town sites with parking and to sell wines sourced directly from producers in bulk only, in multiples of 12.
But with the change in consumer behaviour Gormley took the decision to restructure the business by pivoting it to online sales only – a potentially more lucrative option as it will release capital from the physical stores to invest in attracting more customers.
Mr Gormley believes that Naked Wines has the potential for strong sustainable growth and has said “We also believe that a transformed Majestic business does have the potential to be a long-term winner, but that we risk not maximising the potential of Naked if we try to do both.
His innovative restructuring may prove that his prediction of sales reaching £500m and of an increase in regular customer payments by 10-15% this financial year may well be correct.
There is no need for retail businesses to become dinosaurs but survival in a changing world requires vision and bold decisions.

Categories
Finance Insolvency Turnaround

UK business insolvencies and distress indicators continue to rise

UK business in stormy watersAn alarming number of businesses are in either significant or critical financial distress, according to the latest Begbies Traynor Red Flag Alert, issued just the day before the Insolvency Service revealed the figures for Q1 (January to March) 2019.
484,000 UK firms, or 14%, are in “significant financial distress” while the numbers of those in “critical financial distress” have risen by 17% in Q1.
Begbies Traynor partner Julie Palmer said: “Many UK businesses are currently in limbo and deferring major investment decisions. This combined with consumers holding back on big ticket purchases has resulted in increasing significant distress across many sectors.
“Capital intensive sectors – such as construction and property – are suffering as both business and consumers have taken a cautious approach and limited their exposure.”
These figures would seem to be borne out by the Q1 Insolvency statistics, which showed a continuing upward trend, primarily in CVLs (Company Voluntary Liquidations) and CVAs (Creditors Voluntary Arrangements). Administrations, too, had reached their highest quarterly level since the same quarter in 2014.
CVLs increased by 6.2% compared to Q4 2018, administrations were up 21.8%. and CVAs increased by 43.1%.
Top of the list, as they have been for some time, were the wholesale and retail trade’s repair of vehicles industry sector, which saw the largest increase in underlying insolvencies, with 67 extra cases compared to the 12 months ending in December 2018. This was closely followed by the administrative and support services sector. Next highest were Manufacturing and accommodation and food services.
However, it is possible that the pressure to meet rent and rates, and the continued struggles of High Street retailing account for some of the significant rise in CVAS in the first quarter of 2019 when compared to the last three months of 2018.

No end in sight to the pressures facing UK business

While it would be easy to blame the continued uncertainty over Brexit, Begbies Traynor executive chairman, Ric Traynor, said although this was “the main driver” there were other factors involved, including the combination of faltering European economies and a potential trade war between the US and Europe.
To this list I would add the decline in trade with China which is down to these same factors combined with last year’s slowing growth there.
With the economy being predicted to flatline for the rest of the year and investment sluggish, it seems that UK businesses are facing a perfect storm in their struggle to survive and grow.

Categories
Cash Flow & Forecasting Debt Collection & Credit Management Finance Insolvency

First two companies named and shamed over late payment

late payment penalty?In March the first company to be named and shamed by the Small Business Commissioner Paul Uppal over late payment to a SME was announced.
The Office of the Small Business Commissioner launched an official investigation into the payment practices of the Jordans & Ryvita Company.
Using his new powers for naming offenders the Commissioner investigated Jordans & Ryvita on behalf of small business Magellan Design Ltd, which was owed approximately £5,000. As a result, the money was paid together with a further £1,400 in late payment interest.
This week the results of a second investigation, this time into health food retailer Holland & Barrett, were revealed. It was launched after a complaint from an IT company, which had asked not to be named, over an unpaid invoice of £15,000. The invoice took 67 days to be paid, well outside the company’s contractual agreement of 30 days.
Mr Uppal found that Holland & Barrett had “a purposeful culture of poor payment practices”, in which 60% of invoices were not paid within agreed terms and payment took an average of 68 days. He also condemned the retailer for not cooperating with his investigation, saying: “Holland & Barrett’s refusal to co-operate with my investigation, as well as their published poor payment practices says to me that this is a company that doesn’t care about its suppliers or take prompt payment seriously”.
Since the inception of the Prompt Payment Code and Mr Uppal’s appointment in December 2017 his office has released £3.5 million in late payments for small businesses and attracted 50,000 visitors to its website.

The effects of late payment to SMEs by large businesses can be catastrophic

The FSB (Federation of Small Businesses) has estimated that 50,000 SMEs each year close because of late payments and in July last year published research showing that 17 per cent of smaller suppliers were paid more than 60 days after providing an invoice, while close to one in five smaller suppliers are paid late more than half the time by the public sector.
While the latest results are a welcome development I would argue that until Mr Uppal is given powers to fine offenders they are unlikely to take this initiative seriously despite his efforts, for which some credit is due.
The Government’s Business, Energy and Industrial Strategy Committee has also repeated its call for Small Business Commissioner to be given the power to fine companies that pay late and for there to be a legal requirement to force them to pay invoices within 30 days.
I urge all SMEs to report late payment by large clients and especially well-known names so that more are named and shamed as a way of humiliating them into paying on time.
 

Categories
Finance HM Revenue & Customs, VAT & PAYE Insolvency

Is HMRC buckling under the strain of too hasty IT and insufficient staff?

HMRC needs a conductor to manage the orchestraDoes anyone love the taxman? HMRC is an easy target when it gets things wrong and equally when it seems to be altogether too prompt with reminders!
Earlier this year, for example, the website accountingweb reported an ongoing problem with HMRC charging for late tax return filings for trusts. It transpired that these are not as automated as personal returns and the information on the return has to be input or re-keyed by staff. As a result, even if the tax return is filed on time, any delay in inputting and the HMRC system will flag up a late return and send out a penalty notice.
But HMRC’s system has also been found to not have recorded payments on account on online personal accounts and on paper statements, allegedly a “widespread problem” according to the website.
Other examples have been staff ignorance of the NI (National Insurance) system as it relates to PAYE, of employment allowances, and even miscalculation of tax owed after statements have been submitted, again resulting in incorrect communications.
It is fair to say that HMRC is extremely diligent in following up on late filings, penalties and late payments and in passing cases to its debt recovery teams and in taking swift action to recover monies owed.
At the same time, the Government has been pushing for more and more transactions and communications to be done online.
However, MTD (Making Tax Digital) for example has already overrun deadlines and had to be scaled back – presumably because of problems with the software.
The Treasury was recently accused by the, until yesterday, business minister Richard Harrington of giving SMEs trading with EU States inadequate guidance, which consisted simply of a letter from HMRC advising them to “buy customs software and seek the advice of specialist agents”.
While Adam Marshall, director general of the British Chambers of Commerce, has called for a one-year delay to “Making Tax Digital” – which HMRC still intends to switch on three days after the now-postponed March 29 Brexit deadline.
He argued that it would “give businesses and the Revenue needed breathing space to deal with change.”
When so many Government-inspired digital initiatives have to be either abandoned, delayed or launched but riddled with flaws perhaps it is time to remember that these systems are devised and managed by human beings.
Human beings, even IT developers and HMRC staff, are fallible, but in order to do their jobs the first thing they need is realistic, accurate, clear and detailed information with which to operate.
The orchestra needs to be ready before the conductor can begin.

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

UK business rescue culture isn’t working and new proposals won’t work

Rescue culture is surely preferable to the grim reaper of insolvencySince the Cork Report in 1982 that led to the Insolvency Act 1986 (IA86) there have been a number of initiatives that have led to legislation aimed at promoting a rescue culture in UK.
The shift was from a penal approach to insolvency one based on a belief that saving insolvent companies by restructuring offers a better outcome for all concerned than the alternative of simply closing them down.
This can be achieved by putting the company into Administration, where an IP (Insolvency Practitioner) takes over the running of the company, including negotiating with creditors with the aim of saving the company or at least saving the business by selling it to new owners. In addition to benefitting secured creditors Administration also helps save jobs.
The alternative is a CVA (Company Voluntary Arrangement) where the directors effectively reach agreement with creditors for revised payment terms such as “time to pay” and sometimes for a write down of the debt as a condition for the company surviving. A CVA is supervised by an IP but the directors remain in control providing they meet the revised terms.
There are problems with the current regime as both cases require an IP to be involved and both are enshrined in the IA86 which means that they are tarnished by the reference to insolvency. While this might be the case, it encourages a self-fulfilling prophesy and all too many companies fail again shortly after going through Administration or a CVA which might suggest the restructuring measures were not sufficient when perhaps other factors might also contribute to the restructuring not being successful.
One provision that is missing from insolvency legislation in the UK, when compared to the USA’s bankruptcy protection (Chapter 11) and Canada’s Companies’ Creditors Arrangement Act (CCAA), is some breathing space, or moratorium, that works in practice to allow time to develop and agree a plan before entering any formal procedures.
A moratorium would provide for a temporary stay of action by creditors and suppliers while a rescue plan is devised, and it is argued, would encourage directors to act earlier when their business is in difficulties.
Indeed, there are current provisions for a CVA moratorium as a 28-day period to allow for preparing CVA proposals but it doesn’t work and is rarely used because IPs as supervisors of the moratorium have been advised by their lawyers that they could be held liable for credit during the moratorium period. It is logical therefore that IPs prefer Administration which gives them the control necessary to manage any such liabilities.
This has been ignored during the latest initiative by the Insolvency Service who, as part of efforts to improve the UK rescue culture, have consulted on proposals for a different moratorium period, presumably one that that would allow for a broader breathing space than the current CVA moratorium.
While new legislation has not yet been enacted, it would appear that the consultation has resulted in plans for a 28-day moratorium with scope for a 28-day extension. This proposal on the face of it would appear sensible but like the CVA moratorium it won’t work in practice for the same reasons: it must be supervised by an IP and it could expose IPs to liability to creditors.
Further confusion on behalf of those proposing the new moratorium relates to proposals that a business may only apply for a moratorium if it is still solvent and able to service its debts. This makes no sense, why would a business that is able to pay its debts risk damaging its credibility and ability to operate by advertising the fact that it is heading into difficulties by appointing an IP as supervisor of a moratorium that is part of insolvency legislation?
This is surely counter-productive to any attempts at saving a business since the moratorium would cut off its credit.
In my view, rescue legislation should be part of the Companies Act and if supervision is deemed necessary, then a broader range of professionals ought to be approved, not just IPs.
Furthermore, it is hard to see why an IP would not push for Administration instead of a moratorium and taking on the related liabilities; turkeys don’t vote for Christmas.
The credit for the prospective and in my view flawed legislation goes to R3 whose lobbying on behalf of IPs has captured the turnaround space and in doing so has helped kill off initiatives to develop a rescue culture.

Categories
Banks, Lenders & Investors Cash Flow & Forecasting Finance Insolvency

Monthly global outlook – the Bears are gathering for a global economic slowdown but will it be a crash?

Global economic slowdown - or tsunami?While the “B” word is the focus of attention in UK and cited as the cause of low productivity and a UK economic slowdown, there is a growing body of evidence outside UK that is indicating a global economic slowdown although few are yet predicting a crash.
According to the Independent’s economics writer Hamish McRae: “The European economy has pretty much ground to a halt – and this has very little to do with Brexit. If, however, the Brexit negotiations go badly, then the sky darkens – and not just across Europe.”
Certainly, the prospects across the world are looking gloomier.
Recessions tend to be cyclical and come at 10-year intervals, and it is now a decade since the global Financial Crash of 2008.
Arguably, much more important than Brexit is the fact that ten years on Central Bank intervention continues, there are enduring low interest rates and that many nations are still on emergency monetary policies. And there is now a huge mountain of debt that everyone seems to ignore.
US Nobel prize-winning economist Paul Krugman is one of those predicting that there will be a recession in America by the time Donald Trump comes up for re-election at the end of next year.
The second half data from 2018 suggests that global growth has peaked and reported the onset of falling demand for goods and declining factory output in China, Germany, Japan and South Korea, to name a few of the countries particularly dependent on global trade.
In Davos last month IMF managing director, Christine Lagarde, warned that the risks of a sharper decline in activity had increased. Earlier this month came a report from the WTO (World Trade Organisation) that its quarterly indicator of world merchandise trade had slumped to its lowest reading in nine years.
Several Central banks, including the ECB (European Central Bank) and the Chinese have been trying to stimulate growth and investment.
You may remember that both Paul Krugman and Kenneth Rogoff, who is professor of economics and public policy at Harvard University, predicted the 2008 financial meltdown although they were ignored at the time.
However, interest rates remain at rock bottom and debt has been creeping up. As Krugman says, “we came into the last crisis with interest rates well above zero, we came into the last crisis with debt substantially lower than it is now … and we came into the last crisis with substantially better leadership …”
Herein lies the problem.
The world has changed, perhaps as a result of ten years continuing pain since of 2008 and little prospects of respite in the future.  We have seen a rise in protectionism and “populist” movements, most notably in Italy, in Eastern Europe and in Trump’s America, in his sanctions threatened against China, and in tensions between the US and Mexico.
If, as Krugman predicts and Rogoff warn, another economic crisis is looming it is unlikely that we will see the same, co-ordinated government action as was made by the G20 in 2008 that staved off a complete economic meltdown. Although this time there is little left in the tank, especially given the low rates of interest and huge levels of national debt. I see the seeds of huge interest rate rises.
To quote Rogoff in a recent article in the Guardian: “Crisis management cannot be run on autopilot, and the safety of the financial system depends critically on the competence of the people managing it…. The bad news is that crisis management involves the entire government, not just the monetary authority. And here there is ample room for doubt.”

Categories
Business Development & Marketing Cash Flow & Forecasting Insolvency Turnaround

How to make failure your first step towards business success

failure is just one step on the road to successNone of us is perfect.  Perhaps that is why we admire so-called successful people so much.
But behind almost every business success lies a series of failures. Just ask Thomas Edison, inventor of the electric lightbulb, or Richard Branson, who has made no secret of his past business failures, or even Luke Johnson, investor in and chairman of the recently-failed Patisserie Valerie and business blogger who has written extensively about failure and pertinently for him how to spot and prevent it.
Edison said of previously unsuccessful attempts at his invention: “I have not failed. I’ve just found 10,000 ways that won’t work.”
He also said: “Our greatest weakness lies in giving up.” This along with learning the lessons from failure is the key to understanding how successful people approach failure.
Failure would be better rebranded as a trial and error approach to achieving goals where essentially each instance of failure is primarily a learning experience. Each failure simply requires humility that recognises our fallibility and a degree of honesty, thought and a willingness to learn.

Converting failure to success is all about attitude

A business failure can be a devastating experience but the worst things you can do are wallow in self-pity, sink into a depression, give up or, even worse, blame others. These characterise the behaviour of a victim.
There are plenty of business gurus with advice about dealing with failure, and most will start with advising you to accept that you may have been to blame, but the key is to move on by analysing what, precisely, went wrong and to then try again, differently. Trial and error.
Firstly, you should resist the urge to repeat past mistakes by trying the same thing again, only bigger or cheaper. For example, if your customers aren’t buying your products or services you need to give careful thought to whether your business offers something they want, in the way they can buy it, rather than something you thought was a great idea but they don’t want or don’t know about. How much market research did you actually do?
Secondly, how competent are you at running a business?  Did you have a business plan? Did you regularly check cash flow, produce management accounts and so on?  Did you put in place robust credit control and other processes? We cannot all be good at everything so if you feel you do not understand any of these subjects properly you should have the humility to get in expert help and be willing to act on it.
Were you sufficiently passionate and committed to your business? It may have seemed like a sure fire way to make a lot of money, but that, on its own, is no guarantee of success.  It is also important to be emotionally invested in what you are doing and committed to making it work.
There are plenty of inspiring examples of people who have become successful after multiple failures but what they all have in common is an ability to be honest with themselves and to learn from others, to be passionate about their idea and to never give up.

Categories
Accounting & Bookkeeping Cash Flow & Forecasting Factoring, Invoice Discounting & Asset Finance Finance Insolvency

How can SMEs manage credit control and late payment effectively?

Prompt Payment Code: late payment penalty?There is no doubt that getting invoices paid on time can make a significant difference to SMEs’ cash flow and the lack of cash due to late payment can make or break a business.
Clearly, there are cash flow advantages for those late payers who string out paying their invoices for as long as possible, while the opposite is true for those waiting on the receiving end, often SMEs.
Towards the end of last year Xero Small Business Insights calculated that the average British small business is owed £24,841 in late payments on any given day.  It is clear that Government initiatives, such as getting businesses to sign up to its Prompt Payment Code, are proving less than effective. A year after the appointment of Paul Uppal, the small business commissioner, it was announced that his service had recovered just £2.1m in unpaid invoices on behalf of small companies. Pitiful!
All this has prompted the Government’s Business, Energy and Industrial Strategy Committee to call, yet again, for firms to sign up to the Prompt Payment Code and for the Small Business Commissioner to be given the power to fine companies that pay late. It says large firms should be legally forced to pay their small suppliers within 30 days.
In January Mr Uppal announced a traffic light warning system to be used to name and shame large firms that fail to pay their suppliers on time.
Will this strike terror into the hearts of persistent late payers and force a change of behaviour? I think not, although making it a criminal offence for directors would work, as currently is the case for HMRC’s Security Demands.

Do SMEs do enough to protect themselves from late payment problems?

Annual research by Bacs Payment Schemes showed that in 2018 small businesses in the UK faced a bill of £6.7bn to collect money they are owed by other companies, up from £2.6bn in 2017.
It is a problem that the FSB (Federation of Small Businesses) estimates is the reason for the collapse of around 50,000 businesses a year.
Some, however, would argue that SMEs should take more responsibility for and be more aggressive in recovering monies owed for the work they have done in good faith, but it’s hardly a level playing field. The cost of money claims through the courts is now horrendous.
Of course, a well-managed business should have a robust credit control system in place, which sets clear expectations from the moment it contracts for work, including a stated agreement with the client that invoice payment will be due within a defined number of days, usually 30.  It is wise to also credit check all new customers. It is also wise to check payment is scheduled for payment before it is actually due; this deals with most excuses in advance.
Payment should be made as easy as possible with online banking details and address for postal payments included on all invoices. If it is feasible perhaps a small discount could be offered to those who pay early or within a stated time period. A supplier to one of my manufacturing companies offers 90 day payment terms with a 40% discount if payment is made within 30 days. That’s my margin so late payment is painful.
The credit control system should also have clear, robust procedures for following up on late payers, from sending out reminder letters that make it clear that failure to pay will likely incur significant costs and disruption such as suspension of the account.
However, even with a robust system in place, and one on which the business acts, there may still be late payment problems and SMEs can use such services as factoring, where another company takes on responsibility for collecting and chasing invoices, or invoice discounting, where, again, another company takes on the task of chasing invoices but with the SME having ultimate control.
In both cases, however, these are fee-paying services, effectively “lending” money up front to the SME at less than the full value of the outstanding invoices. If you use such services do be aware that many have a recourse clause so make sure to check if you remain liable or have to reimburse the lender.
While borrowing against book debts might improve an SME’s cash flow, it comes at a price and often with hidden additional costs and conditions in the small print. This is where an independent broker, not an online one, is a useful ally when looking for book debt finance.
Another option is to take out credit insurance although this normally only pays out in the event of your customer going bust and doesn’t solve the late payment problem.
Why should a business have to pay extra/ lose part of its revenue in order to recover money promptly for work it has done in good faith?
What is needed is robust, effective legislation, and follow-up action, with sufficient teeth to eradicate this persistent problem once and for all.
A free guide to debt collection for SMEs is available for download at:
https://www.onlineturnaroundguru.com/p/getting-paid-on-time

Categories
Cash Flow & Forecasting Finance Insolvency Turnaround

Sharp rise in personal insolvencies in 2018 – what might it mean for your SME?

Personal insolvencies - counting the penniesClearly many individuals are finding it hard to cope with rising prices, low wages and ongoing austerity given the latest personal insolvency figures published by the Insolvency Service this week.
Personal insolvencies in 2018 totalled 115,299, a 16.2% rise on 2017 and the highest level since 2011, according to the Insolvency Service.  The majority of these were IVAs (Individual Voluntary Arrangements) which hit 71,034, a record level and an increase of 19.9% on 2017.
Company insolvencies also continued to rise; at 16,090 in 2018 they were their highest level since 2014. The majority, 63.9%, were CVLs (Creditors Voluntary Liquidations).
The top three business sectors for insolvencies were construction, wholesale and retail trade, accommodation and food services.

What does the rise in personal insolvencies mean for SMEs?

The knock on effect of personal insolvencies is consumers reining back on their spending, as they have clearly been doing for some time and most noticeably for retail over the Christmas period. Other types of business will also be impacted.
Given the dire warnings about prices depending on the outcome of Brexit, consumers’ confidence is looking unlikely to improve any time soon.  This is not helped by the week’s announcement by Tesco of a possible cut of 9,000 jobs and worries in parts of the country about the future of employment such as in the automotive industry and for SMEs within its supply chain.
It is also likely that the changes in retailing will continue with more High Street shops closing.
For SMEs, especially those dependent on consumer spending, the likelihood is that they will have to not only scrupulously manage their cash flow and planning but also ensure their invoices are paid on time. They may also be well advised to strengthen their marketing initiatives and those “extra services” that serve small, independent businesses so well by retaining loyal customers.
In these difficult circumstances, to borrow a well-known phrase, “every little helps”.

Categories
Banks, Lenders & Investors Cash Flow & Forecasting Finance Insolvency

How can the causes of investment failure be minimised?

the devastating consequences of investment failure in the 1930sPerhaps the most high-profile business collapse of the year has been the construction giant Carillion, reinforcing the message that no business is too big to fail and that no-one is immune to investment failure.
It prompted questions over the integrity of its auditors KPMG, who in March 2017 had expressed no concern over reported profits of £150m, even though four months later these proved to be illusory.
It also prompted an exodus of investors once the company’s debts became clear and confidence in its viability plummeted, thereby precipitating the collapse.
But should the investors have known better than to trust a business that diversified into a range of disciplines outside its core competence and embarked on a series of take-overs?
There are many causes of investment failure. It is not a precise science and it does involve a degree of trust, not to mention emotion. Too many investors fail to carry out due diligence before they decide where to put their money.
So, the first thing to do to guard against investment failure is to check more than your target’s profit and loss account. You should also look at its balance sheet and its cash flow statement. You might also ask if you understand the business, how it makes money and what it does with the money it makes. It is all about understanding and assessing the risk factors.

Some causes of investment failure

These include a lack of knowledge about an investment prospect, failure to understand why someone might be recommending an investment or using stock analysis reports from sources that are less than trustworthy.
Having no clear goal or strategy when investing is another pitfall. Knowing what you can comfortably afford to lose and how strong is your appetite for risk is essential.
Investment requires discipline and the ability to be patient as well as identifying the right targets for your investment.  It helps also to have a financial adviser you know and trust, who will guide you to developing an appropriate balance of risk weighted returns in your investment portfolio, so that it is not over- or under-diversified.
Another trap that can lead to loss due to poor investments is over-confidence or expecting a significant return in a very short time frame since this becomes like gambling. Investment is, or should be, a long term activity with a level of monitor of how your investments are performing making decisions about your portfolio.
Finally, it is important to remember the warning that the value of investments can go down as well as up, indeed some investments can be wiped out where for most investors the strategy should be based on understanding risk parity.

Categories
Banks, Lenders & Investors Cash Flow & Forecasting Finance Insolvency

How much longer before SMEs get a fair system for dispute resolution with the Banks?

fair dispute resolution with the banks?It looks likely that SMEs still have some time to wait before a cost effective and fair system for dispute resolution with the Banks becomes a reality.
It is now approaching ten years since SMEs’ scandalous treatment at the hands of RBS (Royal Bank of Scotland) and its insolvency arm GRG (Global Restructuring Group), and of HBOS Reading emerged prompting investigations into the way the major banks treat their SME customers.
In July, the FCA (Financial Conduct Authority) announced on completion of its RBS investigation that its “powers to discipline for misconduct do not apply and that an action in relation to senior management for lack of fitness and propriety would not have reasonable prospects of success”.
Andrew Bailey, FCA Chief Executive admitted that its inability to take action should not be seen as condoning RBS’ behaviour.
Earlier in the year UK Finance, the trade body for banking and finance, had appointed Simon Walker CBE – the former Director General of the Institute of Directors – to review the disputes and resolution process.
The result of this SME Complaints and Resolution Review was published late last month and concluded that setting up a new tribunal would be too costly for both Government, SMEs and banks and instead has supported the FCA’s planned extension of powers for the Financial Ombudsman Service to cover business banking customer complaints.
Not surprisingly this has been welcomed by some Banks and UK Finance has called the review a “valuable contribution” to the debate.
Nevertheless, the APPG (all-party parliamentary group) on fair business banking, led by Kevin Hollinrake, has repeated its call for the creation of a financial services tribunal and for a compensation scheme for business customers who were victims of the RBS and HBOS behaviour.
The APPG argues that Walker’s report clearly identifies that there is a limit to the proposals, which do not extend beyond a compensation limit of £600,000, cannot compel witnesses, cannot force disclosure of information nor deal with insolvency issues.
It has also been argued that The Financial Ombudsman Service, even with extended powers, is insufficient since the maximum compensation it can award is £350,000, regardless of the £millions in losses that some SMEs have sustained.
Equally, many SMEs have argued that pursuing complaints using the civil courts as an alternative is hugely costly since large defendants generally adopt a strategy of attrition with the aim of causing their SME claimants to run out of money before the case is heard.
It looks as though there is likely to still be a considerable wait before SMEs get a fair and equitable system for resolving disputes with the disproportionately more powerful banks.

Categories
Accounting & Bookkeeping Banks, Lenders & Investors Cash Flow & Forecasting Finance Insolvency Rescue, Restructuring & Recovery

Why the big four auditors are under intense scrutiny – an update

investigation into the big four auditorsFollowing the collapse of the company Carillion in February this year the role of its auditors came under the spotlight and investigations were promised, notably by the FRC (Financial Reporting Council) and the CMA (Competition and Markets Authority).
The reason for this was that the business had won several large public sector contracts, among them to build two hospitals, and also because its collapse put a number of subcontractors and jobs in jeopardy. However, primarily it was because its financial health was revealed to be considerably shakier than the directors had suggested.
The company’s annual audit had been carried out by KPMG, one of the big four auditors, and in March 2017 it had expressed no concern over reported profits of £150m, even though four months later these proved to be illusory. Perhaps they may have been reassured by the company’s ‘internal auditor’, Deloitte, which might also be looked into since it may have involved helping ‘massage’ numbers for KGMG to report on.
The role of the auditor is  ”to provide an independent opinion to the shareholders on the truth and fairness of the company’s financial statements,” according to The Institute of Chartered Accountants in England and Wales (ICAEW), one of the bodies appointed to approve and register auditors. Auditors’ reports, filed at Companies House, are used by suppliers and other interested parties to make decisions about their involvement with a company.
Not surprisingly, when the FRC, published the results of its annual inspections of the big four auditors in June it singled out KPMG for an “unacceptable deterioration” in the quality of its work.
But it also found that the overall quality of the audit profession is in decline and that only half of KPMG’s FTSE 350 audits. were deemed satisfactory.  In fairness it should be said that the FRC scores for the others in the big four had also declined. Deloitte scored 79%, down from 82% last year, EY fell from 92% to 82% and PwC was down from 90% to 84%.
It also fined PwC (Price Waterhouse Cooper) £6.5 million for its failings in auditing of retailer BHS two years before its collapse.
The calls for a radical overhaul have been growing as there seem to be so many accounting scandals, such as the recent problems with Patisserie Valerie. The calls reflect public concern about a conflict of interest since these businesses also earn massive fees from their clients for consultancy work.
Earlier this month KPMG announced that it will no longer do consultancy work for the UK’s biggest companies if it is also auditing them.

So when will there be some answers on the big four auditors?

According to a report in CityAM last week there are now five investigations either pending or on the go.
The CMA investigation following Carillion was expected to reveal its findings before the end of the year but it has recently announced that it is also intending to study the entire auditing market to see whether the big four were crushing competition from smaller firms.
Sir John Kingman, the chairman at Legal & General, was tasked by the government this summer with reviewing the operations of the FRC, whose outcome may strengthen its powers. The FRC is also reviewing itself separately from the Kingman investigation.
Shadow Chancellor John McDonnell has commissioned Professor Prem Sikka, an academic at the University of Sheffield, to review the sector and make recommendations with this report due by year end.
Finally, the Beis (Business, Energy & Industrial Strategy Select Committee) leader Rachel Reeves (Labour) has announced that it will review both the Kingman and CMA reviews, probably starting in January.
It will take a while before all the results are in and revealed but it looks like time is running out for the big four auditors and they can expect changes to regulation, to their ability to carry out both audits and consultancy, and possibly, some hefty fines at the end of it all.
 

Categories
Debt Collection & Credit Management Finance HM Revenue & Customs, VAT & PAYE Insolvency Turnaround

Why is this Tory Government intent on destroying SMEs?

Wrecking ball destroying SMEsAt the October 2018 Tory party conference, the Prime Minister reiterated her support for businesses, calling them “the wealth creators, the risk takers, the innovators and entrepreneurs …. who generate jobs and prosperity for our country” yet the Government’s actions seem set on destroying SMEs and entrepreneurial initiative.
Whenever a SME encounters financial difficulty that make it difficult to keep up to date with its VAT and PAYE payments, it is invariably HMRC (Her Majesty’s Revenue and Customs) that is criticised for its heavy-handed and unsympathetic behaviour in recovering monies owed.
There is some truth to this given recent revelations of a surge in HMRC action to seize assets, which had risen by 45% in the tax year to March 2018, following a 23% increase in asset seizures the previous tax year. It is debatable whether asset seizure is an effective arrears-gathering measure, given that the seized assets are often then sold at auction for little value and the seizure effectively prevents a business from continuing to trade in a way that can pay off arrears.
It is worth remembering that HMRC does have discretionary powers, such as to agree Time to Pay arrangements to help businesses in arrears to settle their outstanding taxes over time although it is not obliged to offer this facility and no doubt is reluctant to do so if previous arrangements have failed.
Crucially, it must be remembered that HMRC is a tool of Government such that if HMRC is increasing its pressure on businesses, whether via asset seizure or by resorting to litigation, as I have reported in several previous blogs, then surely it is because the pressure is coming from the Government to improve its collections and recoveries.
However, the recent changes to HMRC’s creditor status and to directors’ liabilities in the October 30 Budget are telling.
Firstly, the Chancellor announced a restoration of HMRC’s status as a preferential creditor albeit behind employees unlike its pre Enterprise Act 2002 status of ranking pari pasu (equally) with employees. This means that the recovery of unpaid PAYE, CIS and VAT as any other taxes collected by businesses on behalf of HMRC will rank ahead of suppliers and unsecured creditors in insolvency.
Secondly, the Chancellor announced a measure in the Budget that has so far provoked little comment; he proposes to make directors and advisers jointly and separately liable for the preferential tax liabilities in insolvency. The details no doubt will clarify the nature of any actual liability such as if the insolvency is deliberate or not but this will effectively allow the appointed insolvency practitioners to hold directors to ransom by threatening expensive litigation against the directors personally.
This second measure is likely to be a significant deterrent to anyone becoming a director and also to entrepreneurs and indeed anyone wanting to set up a new company.
Since there also seems to be a disparity between HMRC enforcement action towards SMEs when compared with the seeming light touch on larger enterprises, it is reasonable to conclude that this Tory Government has abandoned entrepreneurs and is intent on destroying SMEs.
Who will become a director once they know what potential liabilities they are taking on?
As ever, government actions speak louder than words.

Categories
Banks, Lenders & Investors Business Development & Marketing Cash Flow & Forecasting Finance Insolvency

Is fear for the future the explanation for a rising numbers of insolvencies?

does fear for the future rule your business decisions?The increased number of insolvencies, largely due to CVLs (Creditors Voluntary Liquidations) between July and September this year is a worrying, but hardly a surprising, trend.
There has been a gradual upward trajectory in insolvencies for much of 2018 but it seems to be accelerating. The latest figures, for Q3, show an increase of 8.9% on the previous quarter and an increase of 19.3% compared with Q3 in 2017. CVLs make up the bulk of the quarter’s insolvencies at 71.6% of the total, that is 3,083 out of 4,308 and the highest number of quarterly CVLs since January to March (Q1) 2012.
As for much of the year the construction industry had the highest number of insolvencies in the 12 months ending Q3 2018, followed by the wholesale and retail trade and the repair of vehicles industrial grouping.
For some time now, it has been clear that businesses have been holding back on investment for growth given the climate of uncertainty that the economy has been in for two years now, and yes, many cite the lack of clarity over the outcome of the Brexit negotiations as their reason for holding off.
My regular readers know that I believe no SME business can afford to stand still without risking eventual failure and that in difficult times I advise focusing relentlessly on cash flow as well as a regular review of margins and Management Accounts.
Nevertheless, it is understandable that there is little confidence in the future after two years of tedium, and, some would argue, incompetence in the negotiations and it may be that the rising insolvencies are a sign of businesses – and creditors – running out of patience or room for manoeuvre.

The signs for the future are not good

In the last week the CBI (Confederation of British Industry) quarterly survey has revealed that smaller British manufacturers expect their output to dip for the first time in seven years during the next three months. It found that order books are struggling as Brexit approaches, with firms reining in their investment plans as a result. Optimism about export prospects for the year ahead is also at its the weakest level since April 2009.
Lloyds Bank’s monthly barometer of business confidence has also shown a marked slide particularly among smaller SMEs and the net positivity balance had fallen by 9% to -7%.
While the latest IHS/Markit purchasing managers’ index (PMI) for the construction industry improved to 53.2 in October a slowdown in housebuilding across the UK and in new orders is weighing heavily on construction, proof, if any were needed, that in this sector particularly survival depends on growth.
On top of this has come the news that two European suppliers of car parts, Schaeffler and Michelin, announced plans to close UK factories, although both deny this has anything to do with Brexit. Instead they cite dwindling demand for smaller tyres.
As reported in the Evening Standard yesterday, research by Populous World has predicted that around 12,450 smaller businesses in London and the South East may go under if there is a no deal Brexit, with the figure at 7,900 failures even with a deal.
As if that were not enough, there will be more pressure on struggling businesses following the restoration of HMRC to preferential creditor status in last week’s Budget, albeit that this is restricted to recovery of unpaid PAYE, CIS and VAT as the taxes collected by businesses on behalf of HMRC.
Given all the above and that HMRC has become increasingly aggressive in seizing assets and in litigating to recover money owed and, as calculated by Pinsent Masons, that the average length of cases of unresolved tax battles going through the courts is now 39 months, it is perhaps no surprise that creditors are running out of patience and CVLs are climbing rapidly.
Many lenders, creditors and even shareholders would appear to be pursuing a strategy of ‘better some cash now rather than waiting for more later’. Is there a real fear of worse to come?

Categories
Cash Flow & Forecasting Finance Insolvency Turnaround

Is the insolvency of your business a failure?

business failureLike old buildings that are decaying or no longer fit for use, businesses often need to be pulled down and rebuilt. Should this be regarded as failure or renewal?
There are three definitions of failure in the Cambridge Dictionary:
Someone or something not succeeding;
Not doing something that you must do or are expected to do;
Something not working or stopping working as well as it should.
Much has been written about the role of directors and how it contributes to the failure of a business but less about the lessons that can be learnt and how they contribute to the future success of entrepreneurs.
Failure is something the business writer and chairman of Risk Capital Partners, Luke Johnson, has written about and must have had further cause to reflect on following his injection of £20 million into Patisserie Valerie, which recently announced that it was in danger of imminent collapse after what may turn out to have been the subject of accounting and auditing irregularities that are currently being investigated.  Johnson was one of the company’s founders and main investors and it is perhaps no surprise that his blogsite and website that cover matters such as prudent financial management and spotting fraud have both been offline since the announcement.

Contributors to business insolvency

The potential causes of a business becoming insolvent are many but the most common is simply running out of cash which can be the result persistent losses, non-payment by customers, over trading and the consequential inability to meet liabilities. These are often attributed to the economy, market conditions and increased competition but essentially derive from decisions by directors or more specifically indecision by directors.
Changes in market conditions, or indeed in the wider economy, are arguably outside the control of the directors, although even here, it could be argued that they should have seen these coming and taken steps to protect it by focusing on shoring up profitability and cash flow.
However, the essential point is that any business failure is down to the actions or non-actions and the mindset of the directors.
How? Here are some human traits:
A lack of reality: this might be down to over optimistic assumptions, over confidence or excessive hubris. This can lead to insolvency following a failure to monitor the situation and take the necessary action to make appropriate changes.
Other, equally understandable and human emotions that can lead to inaction by directors are guilt and shame about their business being in financial difficulties.
Business restructuring advisers often cite these factors as the reason why they are called in too late, since all too often the situation has escalated beyond one which they believe can be recovered.

Where is the blame for failure?

Failure of systems and processes: a good example is the tracking of invoicing and payment processes to protect a business from late-paying customers.  If a business does not have robust systems in place and key people to monitor and act on them, it can quickly find itself in financial trouble.
Failure to carry out sufficiently regular reviews of Management Accounts or to identify warning signs of something going wrong:  this is something I have covered in depth in other blogs but essentially without a regular review of such elements as cash flow, profit and loss and success in meeting targets management will potentially miss early warning signs of something amiss and therefore fail to take appropriate action.
Failure of cash and credit management including debt collection, over trading and non-payment by clients.
These are some of the factors that are attributed as the causes or reasons for an insolvency but ultimately it is down to directors as the decision makers.
Insolvency, I would argue, is therefore a consequence of poor judgement and decision making.
However, this is how we as humans learn, indeed the only people who don’t fail are those who don’t try. Failure is necessary for us to make progress. The only issue is whether we heed and learn from our past decisions and from those of others.
 

Categories
Cash Flow & Forecasting Finance Insolvency

Beware of withholding payments to push contractors into insolvency as a way of saving money

the consequence of insolvencyIn June 2018 a court awarded a contractor substantial settlements after it challenged the behaviour of a large customer that withheld payments in an attempt to force it into insolvency as a way of avoiding payment.
The Technology and Construction Court (TCC) ruled in favour of the contractor, Merit Merrell Technology Limited (MMT), after it challenged the Imperial Chemical Industries Ltd (ICI) repudiation of its contract with MMT on the ‘claimed’ grounds that its welding work was of very poor quality.
The ICI withholding of payments had a knock-on effect for MMT, which was also owed substantial sums by other clients such that its bank eventually withdrew lending facilities. Following professional advice from lawyers and an insolvency practitioner, MMT survived by agreeing a Company Voluntary Arrangement (CVA) with its creditors.
It was alleged that the CVA damaged its commercial reputation and it certainly encouraged one MMT client to take advantage of the situation to substantially reduce its final account by £1.3 million.
Unfortunately, the CVA did not survive with MMT eventually entering into voluntary liquidation three years after its difficulties with ICI began.
At a trial on liability issues, the court found that ICI had its own cost pressures and had made a spurious allegation as an excuse to push the contractor into insolvency, described by the court as “extraordinary thin, verging on factually non-existent”, of poor work by MMT.
MMT then began proceedings to force ICI to pay a withheld interim payment. However, although the court ruled in MMT’s favour, the lengthy process of several court cases, including one by ICI to try to recover payments already made, eventually pushed MMT into liquidation.
In addition to the adjudicated sum of £7 million awarded by the TCC, the court also awarded a number of other sums to MMT: £1.3 million in respect of the reduced final account settlement accepted from its client; £266,472 for wasted management time; £239,369 for the professional fees incurred in relation to the CVA; £168,599  for additional banking costs including bank advisor fees and £58,994 for a VAT loan that was necessary for cash flow reasons.
Regretfully the court’s decision made in June 2018 was too late to save MMT from entering liquidation in February 2017.

The moral of the tale

While arguably ICI achieved its objective of pushing MMT into insolvency, it came at a high financial cost following the various court proceedings and rulings.
Any business considering going down this route should be aware that it may face counterclaims from its target contractor and an exceedingly costly outcome if the courts rule in the latter’s favour.
It could also carry with it some reputational damage, making it harder to attract bids from other contractors and ultimately to end up with planned works not being carried out.
 

Categories
Finance HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery

Update on the business rates and appeals fiasco

is anyone listening on business rates?In August it was announced that HMRC had sent in approximately 25 staff to the Valuation Office to fix the business rates appeal portal, which had been repeatedly cited by businesses as being impossible to use.
As the only mechanism now available for appealing non-domestic rate revaluation, the portal has been cited as the chief reason for an almost 90% reduction in appeals since the 2017 revaluation and just before this blog was due to be posted an article in The Times reported that a Government survey has revealed that almost nine out of ten businesses in the first stages of making an appeal using the portal were dissatisfied or very dissatisfied with the new system.
In the meantime, the numbers of business failures, particularly in the retail sector has continued to climb; many attributing the rise in rates as a factor.
Altus Group, a ratings adviser, reported in August that bailiffs had visited 81,000 businesses because of business rates arrears – an average of 222 businesses per day over the previous 12 months.
Last week, as reported in both the Daily Mail and the Daily Mirror, ONS (Office for National Statistics) figures had revealed that more than 51,000 high street stores had closed in the past year.
Yet more pain was added after the 2.7% August inflation rise was revealed with Altus Group predicting that businesses would face an increase of £819 million to business rates if inflation remained at this level.
Is the business rates system fit for the 21st Century?
There have been many calls for a rethink on business rates, from Rohan Silva and the British Retail Consortium which said they were “no longer fit for purpose in the 21st Century”, in the Evening Standard in late August, to Wetherspoon founder Tim Martin calling for a “sensible rebalancing” to create a level playing field for High Street retailers, earlier this month.
Vince Cable, Lib Dem leader, has called repeatedly for business rates to be replaced by a land value tax payable by landowners rather than by tenants while others have called for a reform of VAT into a two-tier system for physical and online retailers.
But there has been a deafening silence from the Government, with the exception of the Chancellor, Philip Hammond, who claimed many high streets had prospered and that high street retailers needed to evolve in order to survive – no surprise given all the many worthy and pressing claims for increased spending that he will have to reconcile in his next budget.
Business rates affect not only the retail sector but all businesses, a point often forgotten in the ongoing focus on retail.
Is the Government living in an alternative universe or has it become so fixated on its own internal squabbles over the “B” word that it is ignoring all the other pressing issues facing SMEs?
Is it listening to business?
STOP PRESS: The Times has also reported that since the appointment of small business commissioner Paul Uppal last December to tackle late payment to small businesses he has helped just nine SMEs to handle complaints, a topic to which I shall return in a forthcoming blog.
Here is a copy of my free guide to getting paid on time:
https://www.onlineturnaroundguru.com/p/getting-paid-on-time

Categories
Banks, Lenders & Investors Finance Insolvency Rescue, Restructuring & Recovery

I welcome new insolvency proposals – albeit with a few observations

new insolvency proposals shift the balance towards rescueThe Government has at last published its proposals for changes to the insolvency regime after launching a consultation in March 2016.
The new insolvency proposals have been described as akin to the USA’s Chapter 11 system and have been broadly welcomed for the extra support they should provide to help businesses in financial difficulties to restore their fortunes rather than collapsing with often-catastrophic consequences for employees, suppliers and creditors.
Not only that but they also incorporate other Government initiative, to tighten up on scrutiny of directors and on corporate governance.

The new insolvency proposals – main elements

The insolvency proposals include the introduction of a moratorium, initially 28 days from filing papers with the courts. This is intended to allow viable companies more time to restructure or seek new investment to rescue their business free from creditor action. This would be supervised, most likely by an insolvency practitioner (IP). The proposals would only apply to businesses that are not already insolvent. While it isn’t yet clear how this will be different from the existing CVA Moratorium, it is hoped that it will be used where the CVA Moratorium has rarely been used due to the onerous obligations on a supervising IP.
Continuity of supply will be protected under the proposals with the introduction of a prohibition on terminating supply contracts to allow businesses to continue trading through the rescue and recovery process. This sounds similar to the historical essential service supply provisions but in practice was difficult to apply. It ought however to be useful as a tool for challenging ransom demands, in particular for dealing with service suppliers.
Creditors must be kept fully informed of the rescue proposals, which must also be filed with the court, and they and shareholders will be able to challenge them.
Approval of proposals will be based on classes of creditors that can also be defined although any who feel they are disadvantaged can be challenged.
For a class vote in favour of the proposal, 75% of a class by value (of the overall debt), and more than 50% by number must agree to the plan for it to be approved. This sounds similar to the existing class system in a Scheme of Arrangement.
Like existing CVA and Scheme of Arrangement proposals, once approved the proposal becomes binding on any dissenting minority.
In order to provide further protection for employees and other stakeholders the insolvency proposals also seek to enhance the Insolvency Service’s powers to investigate directors and will require directors to demonstrate how the pension pot and salaries can be covered before dividends can be paid. This makes sense as there is no such provision for CVAs.

Some observations

It is a welcome sign that Government is paying attention to businesses and their difficulties rather than posturing after high profile company failures.
The new proposals differ little from those in the 1982 Cork Report that followed a major review of UK insolvency law chaired by Sir Kenneth Cork. While that report led to the Insolvency Act 1986, its rescue proposals were significantly watered down as have been those for most of the subsequent reforms of insolvency legislation. My concern is that lobbying by IPs of the latest proposals will also result in them being watered down, indeed IPs have already established themselves as the main actors.
I would suggest that the term ‘insolvency’ contributes hugely to the demise of companies in difficulties such that I believe the proposals should be used to reform the Companies Act 2006.
Insolvency procedures work well when a company ceases to trade however they do not work well as turnaround or rescue procedures.
The Scheme of Arrangement as a Companies Act restructuring procedure is what needs updating, indeed may of the new proposals are similar. I accept Schemes have not adopted for use by smaller companies but this is easy to overcome by having templates to remove the existing dependency on those few lawyers who are familar with such restructuring. I would even advocate that IPs should run Schemes or the new proposals as revised Schemes since their existing software helps reduce the cost of administering creditors.
I am however concerned that rescue procedures ‘require’ the involvement of IPs. There are other professionally qualified people who might have more experience or at least have a greater interest in the saving of businesses.
My concern is that the new proposals become like CVAs where all too often it is in the interests of an IP that a company considering a rescue fail, or for them that a CVA proposal be rejected, or a CVA fail where failure means they can be appointed as administrator or liquidator. Indeed few IPs have believed in CVAs and I suspect few really believe in rescue and almost no IPs have ever run companies in a CVA.
In view of my comments the role of IPs needs to be carefully considered if the new proposals are to work.

Categories
Banks, Lenders & Investors Cash Flow & Forecasting Finance Insolvency Voluntary Arrangements - CVAs

Why do so many CVAs fail?

failed CVAs? boarded up shopsMy blog earlier in the year (17 May) asked whether the use of CVAs was “a triumph of hope over reality” as they had been increasing noticeably in the High Street retail sector, which has suffered an escalating rate of insolvencies.
A CVA (Company Voluntary Arrangement) is generally used to help a company in financial difficulties by restructuring its balance sheet and reorganising its operations to survive and trade its way out of insolvency. A key aspect of the financial restructuring is reaching agreement with creditors for payment of a lump sum or regular payments over a defined period which is typically three to five years where the payments may be less than the amount owed.
Instigated by the directors, approval of a CVA requires 75% of unsecured creditors where the payment terms are binding on any dissenting creditors providing they are less than 25%. Generally, the earlier a business enters a CVA the better, although they can be used as a means of dealing with a minority creditor who has lodged a Winding Up Petition (WUP) in the courts.
It is too early to say whether this latest crop of retail-related CVAs will succeed or terminate early, but R3, the trade body for the insolvency profession, has published a comprehensive, 90-page, report that examined 552 CVAs started in 2013 to determine success and failure rates and analyse the reasons behind them.
It found that CVA use was “dominated by SMEs, with 514 of the 552 companies reviewed classified as small (or micro) based on Companies House records.” Of these the early termination (generally failure) rate was 65.2%, with early termination in certain sectors dominating: Construction (64.8%), Repair of motor vehicles (73.6%), Manufacturing (66.2%) and Administrative and Support Services (70.5%).
The research also conducted interviews with creditors of companies involved in CVAs, to add some depth to its findings.

What are the main reasons for early termination or failure of CVAs ?

As I said in my earlier blog a CVA will only work if the CVA proposals and any agreed modifications are realistic, achievable and sustainable. Essentially my argument was that most CVAs need fundamental change based on a reorganising the business and often the business model.
The R3 research tends to support my view; its findings are summarised as:
The viability of the terms of the CVA agreed at its outset (or subsequently varied) was often questionable.
Often directors did not implement necessary changes or failed to identify and tackle fully the problems identified in the CVA.
Companies failed to make regular contributions and those contributions that were made simply covered the costs of the CVA process.
Some CVAs returned very little to creditors over their lifetime; either because contribution payments were repeatedly missed or because contributions were only sufficient to cover the costs of the process.
HMRC was seen as the most engaged creditor and the one most likely to vote against a CVA whether for policy or commercial reasons.
Creditors also questioned the length of some CVAs, suggesting that five years was too long, and the competence and objectivity of the nominee(s) – usually an Insolvency Practitioner – overseeing the process.
In 2016 the Government launched a consultation on proposed changes to the insolvency regime, which included a mandatory pre-insolvency moratorium to give time for the details of a CVA to be defined and mandatory protection for suppliers.
Given R3’s research findings and the policy intention of a greater focus on helping businesses to restructure and survive I would argue that it is now time for action to improve and refine the insolvency regime.

The missing research into CVAs

My own assumption about CVA failures focuses on a lack of realism when considering the operational reorganisation necessary to achieve a viable business and then the lack of experience with implementation. The issue therefore is who is best placed to help the directors given that CVA proposals are the directors’ proposals.
I have for some time advocated a distinction between those who prepare and implement CVA proposals and those who act as Nominees and Supervisors of the CVA. All too often CVA proposals are prepared by the Nominee albeit in consultation with the directors. Setting aside the conflict of interests of an insolvency practitioner developing a plan that they will then police, the issue is one of who is best placed to plan and implement change to achieve a viable business. The skills and experience needed for this are more to do with start-ups and investment which are rare among insolvency practitioners.
Replacing directors might seem an obvious answer and in larger companies this may be the right one but I would advocate that CVAs for owner-managed SMEs need independent turnaround specialists.
For those interested in learning more about how to achieve a successful CVA, you might like a copy of my free guide, please follow the link: Guide to Company Voluntary Arrangements.
 

Categories
General Insolvency Rescue, Restructuring & Recovery Turnaround

How do you resolve a boardroom conflict?

boardroom conflict like two rhinos going head to headIt is not unusual when I am called in to advise a SME in distress on restructuring its business that I find that there is a conflict among directors.
Perhaps it is no surprise that in today’s trading environment there should be disagreements at board level about how to proceed, particularly during financial difficulties when people are under stress.
However, a successful turnaround plan depends not only on my thorough investigation of the state of a business, in terms of the numbers and the business model, it also needs the support of the board, suppliers as creditors and other stakeholders, not least the employees.
While a conflict among directors has the potential to undermine, damage and disrupt a business at any time, this is more so in a tight corner when leadership and a united team is needed to execute a turnaround plan.

Tools that can help to resolve a boardroom conflict

While every business, and every conflict, is likely to be unique there are some tools that can help when seeking an acceptable resolution.
Does your company have a shareholders’ agreement or articles of association that lay out an orderly board process when dealing with disputes? Does it have a staff handbook that deals with behaviours that can get in the way of conflict resolution such as bullying and abuse? Are you familiar with board governance and protocols for dealing with issues and majority decisions?
A suitably drafted shareholders’ agreement can be particularly useful to set out those decisions that can be taken by directors and those that require shareholder consent. They can also be used to set out circumstances that require directors to refer matters to shareholders such as when directors disagree.
Does the business have a chairperson who is familiar with governance and their duties as well as knowing and understanding the characters of those involved in the conflict? They need a level of self-awareness in addition to people and communication skills and ought to remain neutral when meetings become heated.
Has the dispute been subjected to a Root Cause Analysis (RCA) to identify where and how the dispute has arisen?  The origins of a dispute in a RCA can be classified as coming from a physical cause, such as a machinery breakdown; human causes, such as personality clashes, not everyone pulling their weight or perhaps making mistakes; organisational causes, such as hidden flaws in a system or process that are likely to lead to misunderstandings; or financial and strategic disagreements such as over investments or the direction of the business.
Whatever the root causes, their appearance may well need engagement by shareholders or even secured lenders concerned about how the company is being managed. It can be important to distinguish between frustration and under-performance or whether there is a fundamental disagreement since the process and outcomes will be very different.
Conflicts of interest among directors are also an issue and should be transparent since directors often have several roles with different stakes in the outcome, whether as employees, minority shareholders, majority shareholders, creditors, guarantors, opportunist, or they are passionate about the business at a level that can make them blind to reality. Whatever their other roles, as directors they have a primary duty to the company including its shareholders and employees when the business is solvent, and to its creditors when it is insolvent including when there is the slightest prospect of creditors not being paid.
Most conflicts can be resolved through listening, understanding, empathising, negotiating and compromise to reach a consensus, and this is where external advisers such as a restructuring adviser can help.
Deadlock situations such as between two directors who each own 50% of the shares tend to be the most difficult to resolve. This is where trusted parties such as friends representing each director can be useful to help the disputing parties distinguish between emotion and practicalities. Some form of mediation or dispute resolution process is also often necessary to manage the process as well as find a resolution.
The courts also offer a useful backstop although it will be necessary to show that alternative dispute resolution options have been explored before seeking judgement.
As an aside, deadlock situations can be avoided by having a simple agreement at the beginning of the relationship. One I introduced years ago as a 50/50 shareholder setting up a business was with a co-director where at the time we both attended the same church. We agreed with the vicar that if ever we had a dispute we would seek and be bound by his adjudication. The vicar understandably didn’t want to take sides but agreed for his part to appoint an appropriate expert who would pursue a process and if necessary recommend a resolution. We agreed that this would be binding on us since we both trusted the vicar and his desire to ensure a fair outcome in the event of a dispute. Fortunately, we never had to call on his wisdom to rule ‘the Judgement of Solomon’.

Categories
Finance General Insolvency

SMEs need help to navigate the business rates system

the potential effects of business rates?Retailers are the most high-profile sector of SMEs that are struggling with business rates and the appeals system following the April 2017 revaluation that came into force last month.
But it is not only the small retailers that are facing challenges.
SMEs’ problems have been repeatedly raised by the Federation of Small Businesses (FSB) and the British Retail Consortium (BRC) both of which have highlighted two issues.
These are the disproportionate business rates rises on smaller businesses compared with larger ones, and a new, revamped appeals system that the FSB in particular has criticised as seemingly “designed to be hostile” to companies.
National FSB chairman Mike Cherry has described the appeals system as bureaucratic and beset by glitches, while offering no in-person support, no phoneline or live chat options and involving a time consuming and opaque process for uploading supporting material when making an appeal.
Why am I not surprised that yet another Government-inspired online system is proving not fit for purpose?  Excessive reliance on digital systems is something to which I shall return in a forthcoming blog.
According to the Government’s guidance on business rates relief SMEs are eligible for relief if their business property’s rateable value is less than £15,000. Those whose property’s rateable value is less than £12,000 are exempt from business rates. There are also transitional reliefs if SMEs’ revaluations took them out of exemption with a cap on bills so that their monthly payments would not increase by more than £50.
However, it seems that 71% of companies are “very dissatisfied” with the Valuation Office appeals process and that appeals had plummeted by as much as 99% between April and December 2017, according to a report in the Daily Telegraph.
On top of this a £500 fine was introduced for any business that was found to have appealed wrongly.
In April the then Communities Minister, Sajid Javid, announced an independent review of the way the business rates system operates. The review is to be led by former Director General for Public Services at Her Majesty’s Treasury, Andrew Hudson. Who had also previously held the position of chief executive of the Valuation Office Agency, as well as having worked in local government. Business rates are collected on the Government’s behalf by local authorities.
Of course, Javid has since relocated to the Home Office, and, so far, there has been no further information on the review.
It is often said that SMEs are the backbone of the UK economy, and according to FSB and BRC figures they inhabit approximately 1 million of the 1.7 million business premises in the UK on which the tax is payable.
If the economy is to survive the still unknown outcomes of Brexit in anything like reasonable shape it will be relying on these SMEs to preserve jobs, to grow and expand.
This means they need a system of fair taxation, a robust and user-friendly rates appeal system and the minimum of red tape and bureaucracy to have a fighting chance of doing more than simply surviving.

Categories
Banks, Lenders & Investors Finance Insolvency Rescue, Restructuring & Recovery Voluntary Arrangements - CVAs

Retail CVAs – are they a triumph of hope over reality?

failed CVA? boarded up shopsMothercare has reported today that it is “in a perilous financial position”.
It seems that rarely a week goes by on the High Street when yet another retailer or restaurant chain announces that it is seeking to restructure its business by entering into a CVA (Company Voluntary Agreement) with creditors.
With footfall on the High Street plummeting, by 6% in March and 3.3% in April, while rents have continued to rise, trading conditions are continuing to be challenging, to put it mildly.
The inexorable shift to online shopping can account for some of this, but there are still retailers that have weathered the storm by developing more agile business models, often by combining online and in-store shopping, by making it easy to “click and collect” or by providing a great in-store experience.
Among the retailers that have announced that they will use a CVA as part of a restructure alongside divesting themselves of under-performing stores and food chains have been BHS, Toys R Us, Byrons, New Look, Prezzo, Select, Carpetright, House of Frazer and now Mothercare.

What are the attractions of a CVA?

Although the CVA is an insolvency process, unlike all the others it can be used to save companies. The others involve the eventual closure of the company.
A CVA requires the support of a majority of creditors who are offered better prospects for being paid than the alternative of closing down the company.
This is likely to be welcomed by a business’ employees who keep their jobs and those landlords and suppliers who keep a customer.
Restructuring provides the chance for a business to raise further capital and also the opportunity to renegotiate onerous contracts, such as leases to agree rent reductions.  From the landlords’ point of view a CVA means they can continue to receive some rent instead of being left with empty buildings for which they will need to find new tenants in a declining market.
From the viewpoint of the struggling business, it offers scope for reorganising the business to address the underlying issues that caused the problems and put it on a more sustainable footing, although they may need the help of a restructuring and turnaround adviser.
Despite the attractions and approval of a CVA, many businesses subsequently fail due to a lack of fundamental change to the organisation and business model as all too often the CVA is simply used for financial restructuring to write down debts and get rid of onerous obligations. It is rarely used as an opportunity to turn around the business.

Key to a successful CVA is the underlying business model

Toys R Us and BHS are perhaps the most high-profile examples of CVAs that failed. Both initially entered into CVAs but shortly after had to admit defeat with Administrators closing down each business.
Clearly, the terms of the CVA are crucial to a successful restructuring effort. It is a binding agreement between a company and those to whom it owes money.
This means that the directors must be honest with themselves about the problems and must take advice from experienced advisers, who will have carried out an in-depth and detailed look at every aspect of the business to identify what can be saved and what cannot.
Crucially for CVAs to succeed, they need to be realistic in terms of retaining debt that can be serviced, including any CVA contributions, but the underlying business needs to be viable with sufficient profits and cash flow to justify survival. If these cannot be achieved they will fail.

Categories
Finance HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery

HMRC looking to prevent directors from using insolvency to game the system and avoid paying tax

There are clear signs that HMRC is ramping up its efforts to improve its tax collection rates.
Among several initiatives, about which there will be more in subsequent blogs, it is focusing on what it calls the “misuse” of insolvency as a means of tax avoidance or evasion.
Since the loss of its preferential status on enactment of the Enterprise Act 2002, HMRC has to wait in line alongside other unsecured creditors during insolvency proceedings.
In a consultation document issued in April HMRC is now proposing that it should be able to use litigation to allow an insolvent company’s tax debts to be transferred to the person(s) responsible for the avoidance/evasion or that directors or shareholders should be made jointly and severally liable for the company’s tax debts.
HMRC’s discussion document acknowledges that Insolvency Practitioners (IPs) must still have a duty of care to the interests of creditors as a whole.
Assets realised into cash during insolvency are distributed to creditors by the IP according to strict insolvency rules. Secured creditors, normally banks and other lenders, and then employees as preferential creditors are paid in full before sharing out any remaining balance among unsecured creditors.
Given the payment priority, HMRC like the other unsecured creditors rarely get anything.
However, if HMRC were to pursue directors through the courts the question is who will be liable?
Will HMRC move up the ranking of creditors of the insolvent company which could risk loss to secured and preferential creditors, and heap further losses on unsecured creditors?
Or will directors and shareholders become personally liable for overdue tax?
There is also a worry that if HMRC proposals were approved this would undermine the recent shift in insolvency regulation, which included a moratorium on creditors’ action, to allow time for a restructure and turnaround plan to be devised.
HMRC is clearly redoubling efforts to recover the maximum amount of tax debt it can. This week a Freedom of Information request revealed that its spending on debt collection services had increased by more than 500% in three years, from £6.2m in 2014 to £39.1m in 2017.
phoenix company and tax debtsThe implications on a rescue culture might go further given that HMRC often exercise their blocking vote to reject proposals for a Company Voluntary Arrangement. This generally leaves a Phoenix as the only option.

In other developments around insolvencies

A HM Treasury minister has urged the Financial Conduct Authority (FCA) to take action on the use of phoenix companies, which it has been argued, allow directors of an insolvent company to walk away from their debts to creditors by setting up a new (phoenix) company enabling it to effectively carry on trading under a different identity.
Robert Jenrick, the Exchequer secretary to the Treasury, was responding to a case where a company offering financial advice had used the phoenix option to effectively “walk away” from its previous business taking its clients with it. However, this had enabled its owner to retain his FCA approval and avoid paying compensation to some unhappy clients despite a Financial Ombudsman investigation finding that the previous company had made “completely unsuitable” investments for the complainants, who had then lost money.

Categories
Banks, Lenders & Investors Cash Flow & Forecasting Finance General Insolvency

Do the Q1 insolvency figures suggest Brexit chickens coming home to roost?

Brexit chickensYet again, as in the last quarter of 2017, construction and retail were the top two sectors in the insolvency statistics for January to March 2018.
The first three months of 2018 were at their highest quarterly level since the same quarter in 2014, with a total of 4,462 companies entering insolvency, 3209 of them via Creditors’ Voluntary Liquidations (CVLs) accounting for 72% of all the quarter’s insolvencies.
Total insolvencies also represented a 26.2% increase on the same quarter in 2017 and an increase of 13% on the pre-Christmas October to December quarter.
Regardless of the excuses of the usual post-Christmas slump, and this year, the effects of the three-week weather event known as “Beast from the East”, it seems clear now that insolvency numbers are heading inexorably upwards as they were throughout 2017.
Equally clear, given the vast numbers of CVLs as a proportion of the total, it seems that company directors are no more optimistic about the future and are continuing to throw in the towel.

So, was “project fear” actually “project reality”?

In the aftermath of the June 2016 majority vote in the referendum to leave the EU, much scorn was heaped on the alleged scaremongering tactics of the Treasury and the then Chancellor of the Exchequer George Osborne for their warnings about the negative effects of Brexit on the UK economy.
While those supporting leaving the EU remain upbeat, the evidence is mounting that all is not well.
Consider the evidence.  Despite the improvements in global growth in the last two years the UK has dropped from being one of the top seven performers to the bottom and last week the ONS (Office for National Statistics) reported that UK growth for January to March had dropped to 0.1% from 0.4% in the previous three months.
The CBI interpreted this as the start of a prolonged economic slowdown and its survey of manufacturers, services and distribution companies led it to predict a near-standstill situation for the next three months.
In a pessimistic comment piece in Sunday’s Observer, the writer Will Hutton was of the opinion that the UK economy was heading for imminent recession, citing as examples the slumps in mortgage approvals (by 21%) and car manufacturing (by 13% for the domestic market and by 12% for export). These are significant examples given that the UK economy depends heavily on consumer spending and confidence, both of which have been in short supply for some time now.
While the pro-Brexit camp remain relentlessly upbeat about the UK’s economic future despite the continued opacity of the negotiation process and the goals, is it time to concede that the fears of those in favour of remaining in the EU are being realised and the Brexit chickens are coming home to roost?

Categories
County Court, Legal & Litigation Debt Collection & Credit Management Finance Insolvency

Are creditors and their lawyers using Winding-Up Petitions for debt collection?

using courts for debt collectionI have written previously about short term thinking by businesses and the effect it has been having on their ability to plan ahead for the medium and longer term.
It has been affecting businesses’ ability to invest in capacity, efficiency and R & D as planning for growth. Instead, most SMEs seem to be focused on cash flow and immediate profits, in that order.
In the current uncertain economic climate short term thinking may seem to be a rational response by creditors seeking payment.
However, there is another, perhaps more worrying trend that I am seeing among creditors, many of them suppliers to SMEs. Larger companies owed money and their solicitor advisers are often pursuing debts by early use of a winding-up petition instead of speaking with their SME clients and if necessary helping them. Unlike most reporting which is about large companies delaying payments to SMEs, I am focusing on large companies’ aggressive debt collection from SMEs.
Sometimes it is necessary for creditors to help their clients who are in difficulty such as allowing time to pay or helping them put a restructuring plan in place.
There is rarely a day when the demise of another business is not reported in the media. At the moment, these are consumer-oriented businesses, such as Toys R Us, Maplin, Carpetright, UK Claire’s Accessories and East, not to mention the many struggling restaurant chains.
Again, arguably, uncertainty about the future could be a motivating factor in using insolvency procedures where creditors are owed substantial sums but all too often one creditor uses legal action as leverage, a ransom even, to get to the head of the queue for being paid.
The lack of trust and consequences of such action have a negative impact on both businesses concerned and the wider economy.
How effective is formal insolvency for debt recovery?
Aggressive debt collection by creditors to wind up clients is very short-sighted because if a Winding Up Petition (WUP) is granted they are even less likely to get their money.
Firstly, the WUP process is in itself costly, including the fees charged by the Insolvency Service and the Practitioner as Liquidator are paid ahead of any distribution to creditors. The IP is most likely to look for the quickest option when realising assets despite any obligation to recover as much as possible. This will normally be based on selling the company’s tangible assets, but the question is how much these will fetch and whether it will be enough to cover its liabilities.
Since the debts to secured creditors such as banks, and to preferential creditors such as employees, take precedence will there be anything left to repay unsecured creditors, such as suppliers?
If the supplier creditors’ primary motivation is to recover their money as quickly as possible, they should also remember that the insolvency process can be lengthy, given that a business can petition to delay the WUP to allow for time to set up a restructuring plan such as a CVA.
Surely, therefore, rather than using the courts as a tool for debt recovery it would be preferable for creditors to have the patience to allow a business the chance to be saved with the help of an experienced restructuring adviser where provision is made for debts to be paid in a manageable way over time. That way, while it would be wise for them not to extend further credit to the company in difficulty, they will keep them as a client with the prospect of getting their money back over time.
The key is to not let the debt grow, to have patience and to think for the medium and longer term.
After all, If the restructuring is successful, the creditor will end up with a potentially growing and successful client company from which their own business will ultimately benefit.

Categories
Finance General Insolvency Interim Management & Executive Support Rescue, Restructuring & Recovery

Could Australia’s new insolvency legislation, SafeHarbour, be a model for the UK?

According to research published in October 2010 comparing procedures in the UK, The Netherlands, Germany and Italy for restructuring insolvent companies: “The UK has a cultural, legal and professional environment that is highly supportive of reconstruction. The UK system offers a wide range of legal routes available, with courts acting flexibly.”
In May 2016, the UK Government launched a three-month consultation on revisions to the insolvency regulations, including proposals for a three-month moratorium before creditors could take enforcement action, measures to protect essential supplies so that businesses could continue trading and prevent them from being “held hostage” by suppliers and a mechanism preventing both secured and unsecured creditors from dissenting to a proposed rescue plan.
Legislation is already in place for companies to obtain sponsorship from an insolvency practitioner (IP) for a moratorium via the courts, initially for 28 days when considering a CVA (Company Voluntary Arrangement) with scope to apply for extensions.
Interestingly the Australian Government has recently introduced SafeHarbour. Enacted as part of a Treasury Laws Amendment in September 2017, SafeHarbour provides for a balance between protecting creditors and “encouraging directors to be more innovative and take greater risks”.

The basics of SafeHarbour

SafeHarbour, Australia's insolvency legislationDirectors can enter SafeHarbour after developing courses of action likely to produce a better outcome for their company.
However, they must demonstrate that they are fully aware of the company’s financial position with up to date financial records and provide evidence that they have taken steps to prevent misconduct. They must also ensure employee entitlements have been paid and have fulfilled tax reporting requirements.
Crucially, the directors must take advice from a qualified turnaround and restructuring adviser, who, in the Australian model, does not need to be an IP.

Is SafeHarbour a possible model for UK?

While SafeHarbour’s measures might appear similar to those of a UK CVA moratorium, the latter are generally not used since the advice to IPs from their lawyers has been that that sponsoring a moratorium imposes huge potential liability on them personally. Here, IPs prefer to be appointed as Administrators since this is seen as the safer option.
In the UK, rescue and turnaround advisers are already deemed to be acting as shadow directors with all the directors’ duties this entails. The protection of a SafeHarbour might provide them with a protection window to prepare and put forward proposals to creditors for consensual restructuring or a CVA. The window is needed because ransom action and winding-up petitions are increasingly used by creditors, in practice on advice from creditors’ advisers, to pursue agendas aimed at frustrating genuine turnarounds.
It is useful to study the seemingly lighter touch of the Australian SafeHarbour legislation, which could be a useful model for the UK to follow, as it would address the limitations in current practice in the UK.
Thanks for this blog are due to Australian turnaround practitioner Eddie Griffith for his excellent and helpful input into the details of SafeHarbour.

Categories
Banks, Lenders & Investors Finance Insolvency Rescue, Restructuring & Recovery Turnaround

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.

Categories
Finance General Insolvency Rescue, Restructuring & Recovery

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.

Categories
Cash Flow & Forecasting Finance Insolvency Rescue, Restructuring & Recovery

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.

Categories
HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery

SMEs – don’t make a difficult situation worse by ignoring HMRC letters

ignoring HMRC lettersWhen SME owners know they are having cash flow problems and will not be able to pay VAT, PAYE, corporation or other tax bills the temptation is to ignore communications from HMRC.
This will only make the situation worse, especially because HMRC (HM Revenue and Customs) are becoming much more proactive with businesses whose payments are overdue, as we reported in September.
Even where a business knows it will be unable to pay, it is always better to let HMRC know, the earlier the better. HMRC is supportive of those who contact them early and a business may be able to negotiate a Time to Pay (TTP) arrangement which involves a payment plan for clearing the arrears.
One thing is certain, though, ignoring the situation will only escalate HMRC action and could, at worst, result in the business being closed down.

What action can you expect from HMRC if you don’t react?

There is a full list of the consequences of inaction on this Government website
In essence, HMRC has powers to collect the money you owe, either by taking possession of the business’ goods and selling them (called variously distraint, walking possession or seizure), or by using a debt collection agency, or by taking you to court to get judgment, or at worst by serving winding-up petition to close down your company.
If things get to this stage, it is also likely to compound your debt problem because there are fees that are charged for each process. It will cost you a fee of £75 for the issue of an enforcement notice, £235 or 7.5% of the main debt above £1,500 and £110, or 7.5% of any goods above £1,500 that are seized whether or not you subsequently pay or they are sold at auction.
If the business has not already asked for advice from a turnaround, restructuring or insolvency advisor it is imperative to do so now.  The advisor will be very familiar with the processes the business is now facing and will investigate the state of the business thoroughly to establish whether all or part of it is viable, will advise on the next steps and help you through any ensuing negotiations.  It is important to remember that a turnaround advisor is on your side.
You are likely to receive a letter from HMRC giving you notice their intention whether to enforce by distraint or issue a winding-up petition. This normally gives you just five days’ notice and the opportunity to communicate with HMRC before you receive a visit from an enforcement officer or the winding-up petition.
HMRC Enforcement officers have the power to seize and remove goods or take walking possession to control goods, rather like those of a High Court Sheriff with a writ. The enforcement officers have the right of peaceful entry and once on your premises may remove goods owned by the company. If there is no public access to your premises or if they are not invited in by you then they may apply to court for forced entry.
Any goods that are subject to a finance agreement, and therefore the business does not own them, cannot be removed but generally the company will have to produce finance or ownership paperwork to support claims that the goods are not owned and therefore cannot be removed.
One thing is certain, ignoring the situation is not an option

Categories
Banks, Lenders & Investors Cash Flow & Forecasting Finance Insolvency Turnaround

The emphasis in turnaround should be on saving a struggling SME

turnaround advisors are like rescue dogsIt is surely preferable to try to turn around and restructure a business than allow it to fail, with the consequent financial and human cost to the business, to employees and to creditors.
This has been acknowledged by both the European Commission (EC) and the UK Government, both of which produced proposals last year that included a 90-day moratorium staying creditors’ action and extending the duty of essential suppliers to continue supplying the troubled business.
In both cases, the aim was to re-balance insolvency proceedings towards turnaround and rescue, while acknowledging the interests of creditors.
Yet, according to the findings of an independent review commissioned by the Financial Conduct Authority (FCA) into the behaviour of the Global Restructuring Group (GRG), the treatment of SME clients referred to GRG by its owner, Royal Bank of Scotland (RBS) hardly followed best turnaround practice.
The FCA’s interim report published at the end of October this year highlighted a number of GRG failures.

Turnaround should be a clear and detailed process for achieving a viable business

The review found that in its training material GRG had clearly recognised the need for careful assessment of a business’ viability based on a wide-ranging investigation, followed by immediate recovery action where it was deemed unviable.
If it had been judged potentially viable, GRG should support a turnaround plan, that was considered, documented and as far as practicable addressed the SME’s underlying issues.
However, in practice, the review found “frequent failures to pay appropriate attention to turnaround considerations.”
These included not carrying out adequate viability assessments and failing to implement and document viable and sustainable turnaround options for the medium and longer term, instead focusing on short term measures such as rescheduling the credit facilities on revised terms.
Nor, said the report, did GRG make adequate use of the broad range of turnaround tools or consider the impact of RBS’ actions in pressing for payment and withdrawing working capital facilities.
In short, GRG’s commercial objectives were prioritised at the expense of turnaround objectives, placing a disproportionate weight on pricing and debt reduction rather than the SME’s longer-term viability.
Some RBS SME transfers to GRG were too late for turnaround assistance, more than one in ten of those sampled were transferred directly to the GRG recoveries unit.
The inescapable conclusion was that RBS’ and GRG’s commercial considerations took priority over any serious efforts at turnaround.
The report, however did not address who should help everyone, the bank as well as the struggling SME it was dealing with. Most banks’ or their insolvency advisers’ review of a struggling SME owner’s ‘turnaround’ plans are likely to include that they are not viable. The underlying causal factors are rarely addressed with proposals for fundamental change in the SME’s plans. And forecasting such plans is something very few have done. Specialist turnaround help is needed as very few bankers, insolvency practitioners and SME managers have ever actually managed a business with the objective of turning it round.
The primary objective of the turnaround advisor and the turnaround process must be, and generally is, to help a struggling business to survive. This normally means initiating fundamental change to achieve a viable business model that can survive in the future, not just get through its immediate crisis.
This is achieved by a careful, detailed and systematic review of every aspect of the business to identify those aspects that are viable, and those that are not and to then come up with a workable plan that will not only save the business but will encourage creditor support, increasing the chances that, if patient, they will in time get their money back.

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Cash Flow & Forecasting Finance Insolvency

How often should SMEs review business contracts?

review business contractsIn times of economic uncertainty, a careful business will regularly scrutinise its cash flow to ensure there are no hidden surprises.
When, as currently, costs rise profits decline unless sales prices, purchase costs and other expenditure are adjusted, and most businesses do this regularly by referring to their profit and loss figures in the accounts.
However, monitoring the management accounts does not keep an eye on the underlying obligations such as those for asset finance, service agreements or outsourced processes with both suppliers and customers where a review of these can identify scope for saving money.
Examples of cost savings following a review of contractual obligations include a recent client that was paying for computers on lease finance many years after the computers had been scrapped. The agreement provided for a three month notice that could have been terminated four years earlier. Another is the standard BT charge of £16.99 per month applied to business numbers to cover listing in their directory. It’s in the small print and very few clients seem to have spotted it.
Another good reason for a review of business contracts is that so many are old and out of date. An example is the agreement with suppliers. This is likely to have been struck as part of a credit application some years ago. An example is another client who had supply agreements with the major building materials suppliers including one with Travis Perkins that was fifteen years old. It was part of a credit application for as £10,000 facility and included personal guarantees given by the directors at the time. It was still in place despite all the directors having left and the facility being increased to £150,000.
So it makes sense to regularly review its business contracts.

Obstacles to changing business contracts

Having conducted a review of the contracts and identified any that are no longer fit for purpose, it may be necessary to seek expert advice and certainly to check the fine print as many contracts contain fees for early termination in the detail. Terminating leases is a particular area that needs advice.
While many agreements can simply be terminated against the contractual notice terms, others may require negotiation.
Even if terms for termination are reached it may be that help with drawing up a watertight and acceptable settlement agreement may be necessary. On the other hand, if agreement cannot be reached, this is where a specialist is needed.
Given the lack of legal experience and constraints on time in most businesses, reviewing contracts tends to be a low priority such that this should be done either as part of a formal annual review or it should be outsourced to advisers. As part of any review a company diary should be updated to flag any notice dates, termination dates and any specific agreements that might need a more frequent review.
What is not in doubt is that contracts should be reviewed regularly.

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Cash Flow & Forecasting County Court, Legal & Litigation Insolvency Rescue, Restructuring & Recovery Turnaround

Insolvencies – the signs are not good for struggling SMEs

insolvencies signpostMore businesses have been declared insolvent during July to September, according to the latest statistics released by the Insolvency Service on Friday, October 27, 2017.
An estimated 4,152 companies entered insolvency in the third quarter of the year, an increase of 15% on the previous three months and of 14.5% compared with the third quarter of 2016.
Construction companies, Manufacturing and Accommodation and Food Service Activities topped the list of insolvencies, as they have in the previous two quarters, and, although final figures have not yet been released for the latest period, the trend is clearly upward.
The news comes as R3, the insolvency and restructuring trade body, released the latest findings of its long-running research into business health.
It revealed that more businesses were showing signs of financial distress increasing from one in five in April to one in four in September. Among the causes cited were decreased sales and increasing use of overdrafts with many reporting that they were at their overdraft maximum limit.
R3 President Adrian Hyde said: “Businesses have faced a number of fresh challenges over the last year. Increasing input costs caused by post-referendum inflation increases and a weaker pound, a rising national living wage, the added costs of pensions auto-enrolment, and, for some businesses, rising business rates will have hurt bottom lines.”
He said investment in new equipment had dropped between April and September from 33% to 22%, which suggested that concern over the economic prospects for the UK was prompting company directors envisaging trouble ahead and building up cash reserves to get them through tougher times ahead.
“The question of balancing competing needs – whether to prioritise solidifying their cash position or investing in their businesses, a key concern in the digital age – is more urgent than ever for many companies, especially with the economic landscape becoming more unsettled,” he said.

Time to revisit the business model?

It is, in our view, more imperative than ever that businesses retain tight control over their cash flow, revisit their business plans and have a close look at their operations to identify where savings could be made. Uncertain times only offer opportunities for those with deep pockets, for most businesses surviving them requires a focus on margins and hoarding cash until a more stable future can be predicted.
It may be a time, sooner rather than later to take a thorough look at the whole operation to identify whether it is time to restructure or pivot the business model to one which is more sustainable. This can involve some level of restructuring in order to be prepared for the possibility of worse to come.

Categories
Banks, Lenders & Investors Cash Flow & Forecasting Factoring, Invoice Discounting & Asset Finance Finance Insolvency

Can SMEs afford to use invoice discounting and factoring?

invoices in filing cabinetBoth invoice discounting and factoring are a means by which a business can borrow against the value of its invoices before they have been paid.
They can be a useful way of funding working capital and managing cash flow, especially for a rapidly growing business, but they also come at a cost.
Not surprisingly the finance comes at a cost which will depend on the services being provided, interest charged and risk of loss to the lender, some being less scrupulous than others.
The amount charged will cover interest on funds drawn and a service related fees. The service fees will change depending on the volume of invoices, value of invoices, concentration of invoices, percentage drawn down, maximum amount borrowed, the level of monitoring necessary and any credit insurance. They can also include set up, audit and introduction fees.
The funding agreement, often hidden in the small print, will include event fees such as termination fees, default fees, collection fees, notice penalties. Many also require the support of personal guarantees. On the face of it they can’t lose money, but you would be surprised at how many do.

What is the difference between invoice discounting and factoring?

With factoring, the service provider takes on managing the sales, ledger, credit control and chasing of invoice payments. With Invoice discounting the business remains responsible for its sales ledger and invoice chasing.
When considering whether to use either service businesses should weigh up the costs against the benefits of freeing time to manage the business (particularly in the case of factoring) and the enhanced control over cash flow, especially if it is intending to grow.
However, again, particularly with factoring, other borrowing avenues will be restricted because book debts will not be available as security.  While this choice provides some protection against bad debts, factors will also restrict your borrowing against poor quality debtors by either disallowing them for borrowing purposes or recording them if they aren’t paid within terms.
In terms of customer service, a business will need to consider the effect on its customer relations of having no direct contact with the business, and especially, how the factoring service treats its customers.
With invoice discounting a significant consideration is how robust the business’ in-house credit and invoice processes are and how the service compares with the rates that may be charged on an overdraft or bank loan. It should be pointed out that banks no longer want to provide overdrafts as a way of funding book debts.
In both cases, the event fees can be sufficiently large to justify some lenders looking for reasons to trigger them. Even with scrupulous lenders, regular defaults become a problem for both parties.
While both services may be an option to consider for a healthy business, it is questionable whether they are helpful to a business that is already in financial difficulty. Turnaround advisers often find themselves having to negotiate on behalf of companies with factors and invoice discounters to persuade them not to pull the plug when, although the money loaned is covered the lender wants to end the relationship and recover their money.

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Banks, Lenders & Investors Debt Collection & Credit Management Finance HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery

How should a business in difficulty choose a turnaround or insolvency adviser?

trusted advisorAll too often directors can feel overwhelmed by the problems they have to confront when their business is in difficulties.
In fact, they may have been hoping the problem will resolve itself for some time, while instead the situation has escalated to a crisis point.
However the problem has arisen, the result is often a shortage of cash and the knock-on problem of not being able to meet payroll, buy supplies or pay creditors. This is where the early intervention of a trusted expert can be crucial to business survival.
Calling in a turnaround or insolvency advisor to look at the whole operation, not just the finances, is essential as their independence will mean any recommendations are honest and impartial.

The questions to ask when choosing an advisor

Advisors may not come cheap, but there is a good reason for this.  The best advisors have a breadth of knowledge and experience across a range of disciplines.  While the most obvious and pressing problems may be insufficient cash and impatient creditors, the right advisers will look for and advise on overall solutions for the business that may involve operational reorganisation, not just a short-term financial fix.
In the course of their investigations and subsequent work to save the business the advisor may have to cover financial analysis of statutory accounts, cash flow forecasts and be able to forecast trends. They will need to understand legal compliance requirements with HR and employment, especially if staff are to be made redundant as a means of saving the business.  If they have run their own business so much the better as they will understand your own anxieties.
They should be able to identify viable parts of the business with potential for growth and be able to negotiate with clients, creditors, employees and union representatives, suppliers, HMRC, banks and if relevant insolvency practitioners, who often represent banks.
Advisors often need to deal with Winding Up Petitions, attempts of seizure of assets by Bailiffs or High Court Enforcement Officers and other action by creditors. This requires them to know the different procedures and the legal options for dealing with them.
Professional qualifications, a track record in saving businesses and people skills are all aspects of restructuring work that directors would be advised to explore when choosing the right advisor. Being aware of the difference between different types of adviser may also help since insolvency practitioners generally work for creditors while turnaround professionals work for companies.
It goes without saying that some companies cannot be saved but with the input of objective and impartial advice from the right advisor, there are normally myriad options for saving most of, or at least part of, a business.

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Banks, Lenders & Investors Cash Flow & Forecasting Finance Insolvency Rescue, Restructuring & Recovery Voluntary Arrangements - CVAs

What is the difference between a CVA and a CVL?

insolvency signpostA CVA, a Company Voluntary Arrangement, is a binding agreement between a company and those to whom it owes money (creditors).
It can allow a company in difficulty to carry on trading, by proposing affordable, realistic and manageable repayment terms to creditors and depends on the company’s proposals and what is finally agreed. It may also include provision for some of a company’s debts to be written off and will usually include a plan for restructuring the company.
The directors formally agree that the company should continue to trade and propose a CVA to creditors.
A CVA proposal is prepared by the directors, normally with the help of turnaround advisers, and then sent to the Company’s creditors along with an independent report on it by a licensed insolvency practitioner acting as Nominee and Convenor of a decision procedure through which creditors are invited to consider and vote on the proposal.
Creditors may respond to the proposal, either by accepting it, accepting it with modifications or rejecting it. Their votes are counted; 75% by value of all those voting, and 50% by value of all ‘non-associated’ creditors voting, must accept the proposals and modifications for a CVA to be approved.
The Nominee/Convenor will also convene a physical meeting of shareholders, to take place after the creditors’ decision procedure.  The meeting of shareholders will decide whether to accept or reject the CVA by simple majority; however if they reject a CVA proposal already approved by creditors, the CVA is still approved.
A CVL, Creditors’ Voluntary Liquidation, on the other hand, is a process by which the directors of an insolvent company can close it down without involving a court procedure and like a CVA, the CVL procedure is defined by the Insolvency Act 1986.
The directors formally agree that the company should cease to trade and propose the CVL to shareholders, and will also propose a liquidator to be appointed. At least 75% of the shareholders must approve the company be placed into liquidation, and over 50% must agree on who should be the liquidator.
The directors will also propose a liquidator to creditors via a decision procedure – either a virtual meeting, where creditors are invited to log on or call into a meeting and vote on who is liquidator, or deemed consent, where creditors are told by the directors who they want the liquidator to be, and will be given a deadline by which they can lodge an objection.
In both cases, the company is insolvent but the difference is the crucial test of its situation and whether with restructuring it can survive to emerge from insolvency in a way that will improve the position for creditors.
In both cases, also, the directors of the company should seek advice from a qualified professional, such as a turnaround professional or insolvency practitioner, to ensure they are abiding by their director duties, the legal obligations that all directors must adhere to and that are designed to ensure that their actions and decisions are in the best interests of the creditors and the company in that order.
Ultimately, the directors have to decide, with advice, realism and honesty, whether their company’s insolvency can be rectified with the right measures to return it to profitability, or whether the situation is irretrievable and the only solution is to cease to trade and liquidate the assets.
In summary, a CVA is a formal procedure for restructuring the balance sheet as one of many tools that can be used to save a company while a CVL is an efficient procedure for closing down a company.
 

Categories
Accounting & Bookkeeping Cash Flow & Forecasting Finance General Insolvency

Detecting and combating business fraud

detecting business fraud
Any business without robust systems can be vulnerable to fraud, either perpetrated by third-party criminals, suppliers, clients or even internally, by employees.
It has been calculated that the typical organization loses 5% of its annual revenue each year due to employee fraud.
As with cybercrime, which we have covered in previous blogs, prevention is preferable to dealing with the consequences, and will help avoid unnecessary loss of cash and write down of profits.
This means monitoring, having clear policies and processes for handling money but also checking they are being followed.

Signs of possible business fraud

Business fraud comes under three main headings, asset misappropriation, corruption and financial fraud.
Watch for unusual behaviour, such as people calling in sick frequently, becoming defensive or irritable. Be alert to complaints from clients or customers relating to a specific employee.
In bank reconciliations, deposits or cheques not included in the reconciliation could be indicative of theft. Other symptoms include credits, write offs, phoney customers, cancelled and refunded till receipts with no documented proof of the reason, also duplicate payments, excessive expenses claims and altered time sheets. The big giveaway here is inadequate accounting systems, inadequate records and a lack of reconciliation that all help conceal fraud.
Another giveaway may be in the stock inventory where the available stock does not match with records. The big giveaway here is inadequate stock control, poor record keeping and a lack of stock checks.

Minimising the opportunity for business fraud

Top of the list is to ensure that there is robust record keeping for all transactions, whether it be transactions with customers and clients, ordering of stock and materials or book keeping.  There should be a clearly-explained reporting system for employees to use if they identify a possible problem.
Keeping records alone is not enough, however.  Regular independent checks to identifying any discrepancies is essential for monitoring the accuracy of reports as well as identifying inappropriate activity.
Make sure that you know your employees so you can detect changes in attitude and behaviour and that they are aware of the business’ policy on fraud prevention and the penalties for anyone caught.
Similarly, if a business is approached by a new client with a potential large order, it is wise to check their credentials with a credit reference agency or, if it is another business, with one of the many services that vet business clients.  It is also helpful to make any new order conditional on payment of a deposit, which can be anywhere from 10% to 50%, and setting up a system of staged payments.
Finally, if fraud appears to be systematic there are outside experts, such as Certified Fraud Examiners (CFE), Certified Public Accountants (CPA) and CPAs who are Certified in Financial Forensics (CFF) who can be hired to investigate.
Prevention of fraud costs far less than the consequences which in some cases can cause a business to become insolvent.

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Business Development & Marketing Cash Flow & Forecasting General Insolvency Rescue, Restructuring & Recovery

Business failure can be a self-fulfilling prophecy

nusiness failureIt is often also a predictable inevitability.
The financial website Investopedia defines irrational exuberance as unsustainable investor enthusiasm that drives asset prices up to levels that aren’t supported by fundamentals.
Eventually, this becomes an unsustainable “bubble” as in the so-called “tulipmania” in the Netherlands during the 1630s, the dot com bubble of the late 1990s and more recently the collapse of many lending organisations through artificially high property prices that resulted in the 2008 Credit Crunch.
The result? Business collapse, often with repercussions well beyond those at the centre of the crisis.
Over-confidence among SME business owners may lead to failure, albeit anyone leading a company must have some self-belief and confidence to make a success of a business.  Taking risks should be based on a calculated strategy underpinned by a consideration of the risks versus the prospects of success.
But the opposite may also apply and equally lead to a business failure. Lack of confidence in a strategy and a reluctance to take risks may result in a business playing safe and stagnating. This can be due to managers not really believing their strategy will work and thereby anticipating failure in a way that reinforces their expectation. This is often the case when manages play it safe.
This may be exacerbated if the company is led by a CEO who is cautious and conservative, and who does not encourage new ideas.
It is common in businesses that have a blame culture where any new initiatives are suppressed.
But that is not how successful entrepreneurs, like the late Steve Jobs, create successful, growing companies.  Jobs was famous for ignoring preconceptions about what can and cannot be done.

What other influences increase the likelihood of business failure being a self-fulfilling prophecy?

Short term thinking can affect a business, not only when it leads to pressure from investors for profits and dividends at the expense of investment and growth.  It can mean that the CEO or business owner is distracted from thinking strategically for the longer term.
Caution over investing can become counter-productive especially when the general business and economic climate is pessimistic and businesses sit on money that could be invested. Over time this reduces productivity by not replacing old plant and equipment or hardware and software to the point where they are costing excessive time and money to maintain or use.
Failure to keep up to date with the latest innovations can lead to a business losing ground against its competitors and eventually losing customers and orders.
It takes a combination of courage and caution, wisdom and daring to keep a business growing and moving forward – and the help of a mentor or adviser to add perspective and help avoid a predictable inevitability.

Categories
Finance General Insolvency Rescue, Restructuring & Recovery Turnaround

ECB calls for more precision in EU-wide insolvency harmonisation

The ECB headquarters buildingThe ECB (European Central Bank) has published its opinions on the EC’s new directive aimed at harmonising practice in dealing with restructuring insolvent companies.
As we reported late last year the EC (European Council) announced changes to allow for what it calls “preventive restructuring”, particularly aimed at SMEs and at harmonising insolvency practice across the EU member states.
The aim of the proposals from the European Parliament and the EC was to help businesses to restructure in time, so that jobs can be saved and value preserved, and to support entrepreneurs whose businesses had failed to recover and try again.
In June this year, the ECB published what it called an opinion on the directive, after noting that it had not been consulted but was exercising its right to comment on “matters in its fields of competence.
The opinion welcomed what it saw as the main object of the proposed changes, to promote common standards and reduce barriers to the flow of capital across borders, but it called for more ambitious action in the efforts towards harmonisation.
It highlights what it considers the two important potential risks in insolvency proceedings: the failure to adequately balance the creditor-debtor relationship and risks and the need to protect and maximise value “for the benefit of all interested parties and the economy in general”.
It argues that “A failure to adequately balance the rights of creditors and debtors could lead to adverse and unintended consequences”.
One of these, it opines, is that the greater transparency and uniformity that would result from the proposals could foster distressed debt markets across the EU, where they are currently “more domestically focussed”. This, it says, would be a concern given current EU banks’ high levels of non-performing loans.
While supporting the use of formal and informal procedures in restructuring initiatives, the ECB would also like to see a code of best practice established to be adopted by all member states.
As an aid to greater clarity, the bank has suggested some amendments to the EC’s proposed wording.

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

Investing in a struggling business – is it ever worthwhile?

the uphill battle to save a struggling businessWhile many people are attracted by the low cost of buying a struggling business where they believe they can do better – and reap the rewards – there is always the risk they are deceiving themselves or being over-optimistic.
It may be that there is a demand for its product or service but if a business is struggling, it is struggling for a reason.
So, it is important for the potential buyer to look closely and with care at why the business is in trouble and to ask themselves whether they honestly have the knowledge, skills, stamina and enough finances to be able to bear the loss if a turnaround should prove unsuccessful.
While a degree of self-confidence is important, confronting the reality of the situation is even more so.

Are there issues the struggling business is hiding?

When reviewing the circumstances of a struggling business a degree of scepticism is likely to be needed.
There may have been problems that can be remedied, such as poor management, poor organisation, a lack of funding or lack of financial control.
On the other hand, there may no longer be a market for the product or service, such as when technology has changed as has been the case with the transition from cameras using film to digital photography, or it may be too competitive such as the van delivery market, or the company’s reputation is severely damaged. Often the mountain is too steep to climb and it may be better to walk away.
Are the directors being honest about what has been happening? Are the suppliers who may also be angry creditors likely to be supportive of a restructure attempt? How many employees will have to be retained by the new owner under the TUPE rules and will this place an excessive burden on costs going forward? Will clients stay with you or even come back?
The answers to these questions, and many more, are crucial when considering buying a struggling business.

Are there better options?

If they would be useful to your existing business it may be better to buy the assets of a struggling business, which will be handled by valuers and surveyors.
In this way buying the database of a struggling business may be a more cost-effective way of increasing the customer base of an existing business than marketing to entirely new customers.
It may be safer to pay more for a profitable business with growth potential where the reason for sale is clear such as someone wanting to retire.
There is always a case of “caveat emptor” (buyer beware) so this route isn’t for the feint hearted and you can afford to make costly mistakes.
Get it right and the spoils can be huge, but you are warned.

Categories
Business Development & Marketing Finance General Insolvency Turnaround

We can learn a lot from China’s global business strategy

China and world mapThe business world has become a very uncertain place since UK voted to leave the EU, the election of Donald Trump as US President and now the UK’s impending General Election.
Yet, rather than actively seeking more widely for opportunities there seems to be a level of inertia, whether from complacency or frozen panic, among UK businesses.
We can learn a lot from the way China is pursuing its growth strategy across the world and creating links on multiple fronts with other countries.
These have included investing in massive infrastructure projects in Africa and central Asia including a rail link between China and London. The first return train from Yiwu on China’s East coast completed the 15,000-mile round trip two weeks ago.

The importance of having a vision

Only time will tell what the outcome of the Brexit negotiations will be but already the repercussions of the decision to leave are beginning to show in the UK economy.
Some companies have already announced plans to move some of their operations to other places, such as Ireland, France or Germany and the £Sterling devaluation has begun to feed through into food and other prices in the shops and into UK inflation.
This will add to the trading pressures on UK businesses.
It is well established that a business that stands still is one that will ultimately stagnate and is unlikely to survive.
So, adopting a “wait and see” approach will not do. UK business leaders need to be planning ahead and widening their horizons, at the very least by exploring options and making connections as a prelude to defining plans for the future.

Turning the vision into a global business strategy

Given the size of China and their increasing involvement and influence in the global economy, it might seem daunting to make approaches but they offer scope for developing a strategy that reaches out to the rest of the world.
A first step could be to establish links with Chinese people in London and work out opportunities for forging relationships and doing business with them. Not just buying from them but there are opportunities for collaborating with them, for providing the technology, skills, experience and even products to them as part of a strategy that might help UK reverse the decline of its global business interests.

Categories
Banks, Lenders & Investors General Insolvency Turnaround

The corporate psychopath poses real dangers to a business

the executive hiding a knife behind his backMichael Douglas’ Gordon Gekko, Leonardo Di Caprio’s Wolf of Wall Street, or the late Mirror Group owner Robert Maxwell – what do these fictional and real characters have in common?
They are all examples of a corporate psychopath, the second category we are exploring in our look at  psychology’s Dark Triad (with narcissism and Machiavellianism) of personalities, and, say researchers, often over-represented at the top levels of the business world.
The US criminal psychologist Robert D. Hare called such people Snakes in Suits while both Oliver James, UK psychologist and author of Affluenza and Office Politics: How to Thrive in a World of Lying, Backstabbing and Dirty Tricks, and Clive Boddy, Professor of Leadership and Organizational Behaviour at Middlesex University, have suggested that the 2008 Global Financial Crisis was the result of a mass outbreak of corporate psychopathy.
So, what is it about such people that makes their behaviour potentially so toxic and ultimately damaging to business?

Corporate psychopaths, the good the bad and the ugly

As with the Dark Triad’s two other elements, narcissism and Machiavellianism, the propensity for damage both to colleagues, employees and to a business by a corporate psychopath is all a question of degree.
Typically, they are charming, intelligent, sincere and have powerful personalities, all of which arguably are needed to propel the individual to the top in their career. Often such people perform well at interview, appearing alert, friendly and easy to talk to. They seem to be able, emotionally well-adjusted and reasonable. All traits of a high functioning psychopath.
However, the negative qualities underlying these apparent positive qualities are callousness and insensitivity even if well hidden behind a smooth façade.
Clues to the corporate psychopath’s real persona emerge over time, however.  They may repeatedly humiliate colleagues or subordinates to get their way, perhaps regularly lose their tempers, take credit for others’ accomplishments and be “economical with the truth”, all forms of bullying and coercion with little or no regard for their victims.
They will typically set unrealistic goals for others to meet or come up with new ideas without properly assessing them or following through and this can be a problem when they are in positions of power, where they can issue directions for others to carry out, or try to, thereby setting their victims up to fail in a way that undermines them.
It is no surprise that the consequent working atmosphere for colleagues and its effects on business productivity can be dire.
Dealing with the toxic behaviour of the corporate psychopath means trying to anticipate their actions, documenting all instances of abuse, somehow not taking their behaviour personally and always having witnesses during confrontations; easier said than done but essential to prevent serious or even fatal damage to a business.
“Psychopaths loot corporations. They gamble with our money and then turn to the public to bail them out,” says Oliver James.

Categories
Business Development & Marketing Cash Flow & Forecasting Factoring, Invoice Discounting & Asset Finance Finance Insolvency Turnaround

The Pitfalls of Overtrading

businessman turning out pocket empty of cashA business that is overtrading is one that is at risk of becoming insolvent.
Overtrading is when a company is growing its sales faster than it can finance them, in other words, spending money it hasn’t got by taking on additional orders when it can’t afford to service or fulfil them.
This relates to a lack of working capital to fund the business and the cash cycle of contracts where creditors are often paid before payments are received from customers.
In this way a company can be profitable and yet run out of cash.
While it is healthy for businesses to pursue growth, a lack of honesty with themselves and their situation and a lack of forward planning can put them in this position. The rate of growth needs to be realistic for several reasons, including resources and capacity, both of which normally require funding ahead of income.
While there may be a strong temptation to say “yes” to new orders, a business needs to be sure those orders can be fulfilled, not only to avoid damaging its reputation but also because ultimately it can lead to insolvency.

How can a business avoid overtrading?

When there are more orders coming in than there is capacity to cope with, one solution is to price work in a way that manages demand. This need not be simply by putting up prices but more by having a pricing strategy. It may be necessary to protect the relationship with long term customers by pricing loyalty and long term commitments. Alternatively, future orders or flexible delivery might be priced at a lower rate than late orders and short notice delivery rather like the airlines. It may be that there is scope for staff to work overtime and share the benefit of increased prices.
Another way of looking at demand is to sell capacity rather than goods and services. A well-organised business ought to schedule work and know when an order can be easily fulfilled albeit on its own terms. By managing customer expectations, such as for a longer delivery timetable, a business can establish a pipeline of future work to keep everyone busy, at a level that works for the resources and capacity.
Ideally, when a business is planning for growth, it should look carefully at its finances before it starts any marketing or sales activity with this goal in mind.
For SMEs, this could include looking at the possibility of accessing regional growth funds and other cash flow and asset finance options, providing they can meet the conditions. If more funds are available then a higher level of growth can be achieved.
Negotiating arrangements with suppliers may be another possibility, especially if the business has a long-standing and good relationship with them. They might value longer term commitments and provide extended credit terms.
Another solution is to manage trading terms with customers, for example by requiring the payment of a deposit up front, stage payments, payment on delivery or reduced payment terms.
Using factoring and invoice discounting as a means of freeing up finance to pay fund orders may also be a solution as this will provide access to cash before an invoice is paid.
Having a product or service for which it is clear there is a substantial demand is not enough.  To grow a business, resources and working capital are needed if it is to avoid the consequence of overtrading: insolvency due to running out of cash.

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Business Development & Marketing Cash Flow & Forecasting Finance General Insolvency Rescue, Restructuring & Recovery

Restructuring is not a dirty word

dial pointing to optimisationThere is a saying: “If you always do what you’ve always done, you will always get what you’ve always got” variously attributed to Anthony Robbins, Albert Einstein, Henry Ford and Mark Twain.
Whoever said it, the phrase is particularly appropriate for businesses, from SMEs to larger corporates, in that no business can afford to stand still, even when things are going well.
Economic environments and business circumstances change as time passes and so should business plans, models and methods in a process of continuous improvement. If not, a business that was previously performing at the top of its abilities compared with its competitors can rapidly start to drift through inertia into potential failure.
An obvious example of this drift has been the well-known chains in the retail sector, which went through phases of presence on every High Street to shifting to large stores in edge of or out of town retail parks.
Then, when the pace of closures started to accelerate, it became clear that they had failed to factor in the growth of online shopping or react with agility to the challenge it presented.
Inevitably some went into administration and could not be saved, such as Woolworths and more recently BHS. Could they have been saved if they had been less complacent?
A proportion of consumers say they would still prefer to be able to inspect goods before they buy them, but it took a while before the retailers restructured and developed a model that satisfied both online and in-person shoppers – whether easy return by post or click and collect – and those that did have survived and remained profitable in what is a difficult market.
Manufacturing, banking,  estate agency, even legal services are all examples of industries that are undergoing a radical transformation with many individual examples of businesses that are going bust having failed to evolve.

So why does restructuring have such a negative image?

Sadly, many businesses that end up in need of restructure and turnaround leave it too late, until after an insolvency practitioner has been called in because they are in financial difficulties.
This, we believe, is why there is such a stigma attached to the word “restructure”, when actually it could be seen as a positive, agile and forward-looking initiative.
It may be that some have practised continuous improvement to update their business plans, but have lapsed in their rigour.
One issue is that change tends to involve investment in people, premises, equipment, process and marketing which can be expensive and tends to have a negative impact on short term profits. Incentive packages for professional managers have contributed to such short term thinking.
Investment like continuous improvement can involve constantly updating to stay current with the latest developments in an industry, where all too many treat it as a one-off activity that plants the seeds of future failure.
In a fast-changing economic world it does not take long before performance, sales and revenue start to slip, supplier prices perhaps start to rise and before they know it they are facing a cash flow crisis.
In fact, calling in a restructuring adviser when things are going well means a business has access to an objective outsider with the knowledge and expertise to assess their business model and processes and suggest improvements that will help a business to remain prepared for whatever the future may bring and to plan ahead for the investment they may need to make in such things as automation and new technology.
Whether restructuring, turnaround, change or transformation it should be seen as a positive initiative.

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Banks, Lenders & Investors Cash Flow & Forecasting Finance Insolvency Rescue, Restructuring & Recovery

What next for business insolvencies in 2017

solvent or insolventCompany insolvencies for the whole of 2016 rose slightly, subject to a caveat from the Insolvency Service.
The latest results, published on Friday, 27th January, showed an annual increase of 12.6% on the year before, but the service said that this was “due to 1,796 connected personal service companies (PSCs) entering creditors’ voluntary liquidation (CVL) in Q4 following changes to claimable expense rules.”
Excluding these actually meant that insolvencies for 2016 had risen by 0.3% compared to 2015. The rise was driven by a rise of 1.1% in CVLs and a 0.7% rise in compulsory liquidations. All other types of insolvencies fell.

What was the problem with payment via PSCs?

It was estimated that the Government was losing around £400m of tax revenue because of the PSC set-up governing expense rules for freelancers and contractors.
The regulations were changed in the Spring 2016 Budget to eliminate a loophole in the HMRC IR35 provisions that enabled such workers to take their payments as dividends and a minimum wage from specially set up personal service companies thus enabling them to minimise their tax payments.
It was a system widely used by everyone from entertainers, IT contractors and public sector employees.  The government argued that they were not contractors at all but “disguised employees”.
The most vulnerable sectors in the UK economy and the outlook for 2017
Sector breakdowns for insolvencies published by the Insolvency Service lag behind by one quarter so the most recently available information is up to the end of Q3, September 2016.
In the 12 months to the end of Q3 2016 the construction sector suffered the highest number of new insolvencies, although the figure was down slightly at 0.05% on the 12 months ending in Q2 (June 2016). Next highest was wholesale and retail trade & repair of motor vehicles and motorcycles sector.
These, together with administrative and support service activities, accommodation and food service activities and manufacturing remain the most vulnerable sectors of the UK economy.
This week, business recovery practice, Begbies Traynor’s latest Red Flag research revealed that more than 275,000 companies were showing signs of “significant” financial distress at the end of last year.  In the final quarter of 2016 it found 276,518 businesses were experiencing ‘significant’ financial distress – that’s up 3% compared with the same time in 2015 and of these 91% were SMEs, almost a quarter of them in London.
There are signs that the volatility of £sterling and its effects on import prices for food, oil and raw materials are already stoking up inflation with no likelihood of any reduction in pressure on prices while Brexit uncertainty is ongoing and the likelihood is that there will continue to be an increase in insolvencies in throughout 2017.

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Business Development & Marketing Cash Flow & Forecasting Finance General Insolvency Turnaround

Where next for High Street retail?

Christmas High Street sceneAs the figures for pre-Christmas trading are appearing a clear divide is emerging in performance between non-food and food sales performance.
This is supported by Next reporting that sales fell by 0.4% compared to 2015.
However, as predicted, Marks & Spencer and John Lewis also reported increased sales in non-food items.
Discount retail posted the biggest gains.  B & M, which offers a range of household, DIY, furniture, clothing and other items, has reported a 7.2% rise in like for like sales during the three months up to December 24.
Perhaps predictably, however, online buying continued its inexorable upward trend by +19% according to BDO.
High Street shopping remained relatively quiet until the last week before Christmas, with analysts suggesting a variety of explanations ranging from Christmas falling at a weekend, giving a full week for “last minute” shopping, to consumers being more careful about their spending, to the Black Friday hangover and inevitably to the rise of online shopping.
Overall, retail analysts at BDO are predicting a slight fall overall in High Street retail trade in Dec 2016 after a significant fall of 5.3% in Dec 2015.

Less discretionary spending and more on “essentials”?

Interestingly, the food retailers have generally experienced increased sales in the pre- and post-Christmas period. Again, it was the discount end that did best with Aldi reporting sales up by +15%, and Lidl by +10%.
But of the “big four” supermarkets that have so far reported, sales were also up, at Sainsbury by .1%, largely fuelled by its Argos operation, at Tesco by 1.8%, at Morrison by .2%. Marks & Spencer, too, reported increased food sales, up by.6%.

Can retailers relax a little in 2017?

Despite the slightly more positive Christmas picture compared with 2015, this year retailers will still face several pressures as higher import prices thanks to a devaluing £Sterling feed through and hit both their costs and consumers’ income.
Food prices are expected to rise but so also are clothing, a great deal of which is manufactured outside the UK. What happens to oil prices will also play its part in increased transport costs and the price of petrol at the pumps reducing discretionary spending.
Two significant costs that may also affect High Street retail are the effect of Quarter day rents due at the end of December and the impact of business rate revaluations due to come into effect in April. While the latter may benefit smaller independents if may hit the larger stores hard. Given also the ongoing Brexit uncertainty inhibiting investment, will we see another BHS-style High Street name collapsing?

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Banks, Lenders & Investors Cash Flow & Forecasting Finance General Insolvency

Economic pressure is building for a storm in the coming years

stormy skyIt is a brave, or foolhardy, man or woman who would try to predict what will happen to the economy in 2017 especially in light of the various shocks that we experienced in the US and UK in 2016. But the trends as evidence of a building financial pressure are irrefutable.
An incoming, and potentially “protectionist” US president, who seems to favour diplomacy and policy announcement via Twitter, and the wholly avoidable but now irrevocable decision by the UK to leave the EU with the prospect of lengthy negotiations before the process is complete make for a cloudy and uncertain picture which adds more pressure and most likely brings forward the inevitable storm.
The trends and pressures that give clues have been covered for some time by Alasdair Macleod, Head of Research for Goldmoney, and are summarised in his nuanced and thoughtful Outlook for 2017 that actually looks further than the year ahead for the USA. And as the cliché goes “when the US sneezes, UK catches a cold” or worse “when US catches a cold, UK gets pneumonia”.
Investor over-confidence in expectation of a business-friendly pro-tax reducing regime, a shift from monetary to fiscal policy leading to a rise in budget deficits and rising inflation are among the signs he identifies.
At the same time, although all this is reminiscent of the 1970s when interest rates soared to as much as 13%, this time it is in a climate of massive debt leading to constraints on the Federal Reserve’s ability to increase interest rates for fear of precipitating a collapse in the economy.
“Next time, when a financial crisis occurs, the problems will be more widespread, encompassing bond markets, property, equities and governments themselves. It will be ebola compared with a flesh wound. There will be no option other than to rapidly expand the quantity of money on a global basis, with central banks buying up government debt, ultimately fuelling price inflation even further,” Macleod predicts, suggesting that tangible assets will be the only protection against devaluation of fiat currencies, although perhaps not as soon as 2017.

What is the position of the UK economy by comparison?

Given that for at least the last 20 years the management of the UK economy has been based on similar “neoliberal” principles to those in the US, in our view, the UK faces a similar cocktail of risks and there have already been some signs to reinforce this, though not yet at the level to indicate an established trend. Inflation and interest rates will eventually bite on the printing of ever more paper currency or more Quantitive Easing which both amount to the same devaluation of £Sterling incidentally to 1.55% of its value in 1969.
The Chancellor’s Autumn Statement included investment in digital and physical infrastructure – a shift to fiscal measures – and the Bank of England has continued to keep interest rates at their current low level.
On Wednesday, the British Bankers’ Association (BBA) revealed that in the 11 months from January to November 2016 the rate of saving had increased by 4.8%, climbing from £19.8 billion in 2015 to £32.4 billion in 2016 so far, suggesting that people are already anticipating predicted inflation and stagnating wages.
This week the FTSE 100 reached a new record high at 7,111.69, suggesting a level of investor confidence in equities, or is it more a lack of good quality stock available for safety?
We had already learned that inflation is expected to rise in 2017 and have also had a prediction from Nationwide that house prices are expected to stabilise rather than continue to climb ever upwards.
So, the likelihood is that the UK too is facing a “perfect storm” similar to Macleod’s analysis of the USA, with the same constraints on Government’s ability to act and a consequent devaluation of its fiat currency, bonds, equities and for home owners a decline in the value of their property by 20%.
The storm may not erupt in 2017 but the pressure is mounting so we advise businesses to be prepared and despite all this, we wish you a happy and prosperous New Year.
 

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Business Development & Marketing General Insolvency

2016 review – an uneasy year for businesses

2016 reviewIt seems like a very long time since the then Chancellor, George Osborne, warned in January 2016 of a dangerous “cocktail of risks” facing the UK economy.
The British Chambers of Commerce (BCC) echoed this, citing volatile stock markets, plummeting commodity prices, a potential slowdown in China, a poor 2015 Christmas for retailers and uncertainty about the outcome of the referendum on the UK remaining in Europe.
March brought news of Tata Steel’s decision to sell off or close its UK steel operations, prompting fears for hundreds of jobs particularly in Port Talbot, Wales.  While by November Tata had announced it had agreed a deal with the various trades unions over Port Talbot, possibly safeguarding an estimated 8,000 jobs, the outcome is not yet 100% certain.
In April came news of yet another large retail collapse, this time BHS.
In the run-up to the June EU referendum there were signs of a marked slowdown in investment decisions, coupled with worries about skills shortages if restrictions should be imposed on overseas recruitment.
In June, of course, the outcome of the referendum was a majority in favour of leaving the EU and the first monthly Markit Purchase Managers’ Index (PMI) immediately thereafter showed that the UK economy had been shrinking at its fastest rate since 2009 with confidence in both manufacturing and services falling below the benchmark of 50.
The decision also precipitated a massive devaluation of £Sterling by 15% against the $Dollar and by 10% against the €Euro, which benefited exporters but was predicted to eventually feed through into higher prices for imports and increased inflation. In response, the Bank of England further reduced interest rates.
Another indication of slowing global economic growth came in September with the collapse of the South Korean company Hanjin Shipping, the world’s seventh largest container company.
However, on the whole business activity post-Referendum showed no marked signs of contraction and by November the monthly Markit PMI index was showing upward trends in activity in Construction and Services. But just this week the BCC was warning that the “business as usual” approach that had so far prevailed since was unlikely to last and that business optimism was “continuing to fall”.
At the same time, quarterly reports on business insolvencies have remained steady, showing only statistically insignificant increases.
Also in November Donald Trump won the US presidential campaign, prompting yet more concern and uncertainty, particularly about the impact on other economies, including the UK’s given his notably “protectionist” views as stated during the campaign.

What was 2016 like for SMEs?

The measures introduced in the 2015 Small Business, Enterprise and Employment Act started to come into force with April deadlines for UK companies to compile PSC (Persons with Significant Control) registers.  There were also changes to the taxation of income received from share dividends with the introduction of a new tax-free dividend personal allowance.
Pension Auto-enrolment continued and there was another potential worry for SMEs with the government’s proposals for businesses to file quarterly tax returns.
There was one bit of potentially good news in the April budget, when the threshold for business rate tax relief was increased to £15,000, which may be good news for small High Street retailers, once the outcome of September’s rates revaluations become clearer.
A change of regime in Government produced some recognition of the difficulties for SMEs with the new Chancellor, Philip Hammond’s Autumn Statement, promising extra investment in local transport and digital infrastructure as well as Rural Rate Relief being increased to 100%. But business costs are also mounting with increases in the national living wage, insurance premium tax and changes to NI rates.
The 2016 picture will not be complete, however, until the Christmas retail trading figures and the next set of quarterly insolvencies are revealed sometime in January 2017.

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Banks, Lenders & Investors Cash Flow & Forecasting Finance General Insolvency

UK Business winners and losers – is uncertainty to be the new normal?

businessman on uncertain road aheadThe numbers of cranes on a city’s skyline are often taken as an indication of the health and vibrancy of its economy.
Not only are cranes evidence of demand, money and resources but also of jobs, not just in construction but, eventually, for occupiers of the buildings.
Whether such observations hold true in the current economic circumstances is open to question.
The most recent Markit/CIPS monthly snapshot on construction for November, published on December 2, would seem to reinforce the impression of health showing construction activity expanding to an eight-month high, albeit purchasing managers are also reporting a steep increase in materials costs.
On the other hand, however, on November 22 it was reported that a large Manchester-based heavy machinery plant-hire group, Hewden, with 40 branches across the UK and a workforce of 750, had gone into administration. 251 people, many of them crane operators, were made redundant. The Guardian report said Hewden was owned by private equity firm Sun Capital Partners, which had warned in October that market uncertainty following the Brexit vote had adversely affected a number of large construction and investment projects.
Yesterday’s publication of the IHS Markit/CIPS purchasing managers’ index for the Service sector also showed a rise from 55.2 in November from 54.5 the previous month. But here, too, there was a note of caution from Chris Williamson, chief business economist at IHS: “Rising prices – often linked to the weaker pound – are a big concern, however, and suggest that inflation is set to lift higher.”
These examples illustrate how difficult it is for SMEs to assess what they might be facing in their economic future and how best to prepare for it.

Known knowns and known unknowns

There are a number of triggers that could affect what happens both to the UK, EU and US economies and there are plenty of question marks over all of them.
First and most obvious in the UK, as the Supreme Court hearing gets under way into whether parliament’s consent is needed to trigger Article 50, is the uncertainty over the start date, length and likely outcome of negotiations to leave the EU.
Equally it is unclear whether the lower value of £Sterling will encourage or discourage investment in the UK. However, the fluctuations in the Exchange Rate and their effect on £Sterling in relation to the $US and to the €Euro will doubtless continue.
Yesterday, £Sterling had risen against the €Euro following the Italian referendum on constitutional change, in which the Government was defeated. Where will this leave both the fragile banks in Europe’s third largest economy and also the EU economy?
Perhaps the biggest unknown is what will happen when President-elect Trump takes over in January 2017. How protectionist will he be? Will he follow through with fiscal stimulus, which is likely to lead to both inflation and a rise in interest rates and a shift from economic recovery to recession as happened in the UK’s Heath Government in the 1970s? This time with considerably higher personal debt there is less room for manoeuvre and in a much larger economy than when UK asked for an IMF bail-out.
Then there is the recent seeming resurgence of OPEC in controlling output and thereby the price of oil.
There are many uncontrollable factors in a globally interconnected economy that are likely to buffet any national economy and affect its businesses, regardless of Brexit and whether SMEs are trading locally or are exporters.
The omens are not good but inevitably for some SMEs the prospects may be fantastic and for others quite the opposite. What is sure, though, is that for the foreseeable future the uncertainty of unknown unknowns is the new normal.

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Banks, Lenders & Investors Cash Flow & Forecasting Finance General Insolvency Rescue, Restructuring & Recovery Turnaround

UK's proposals for restructuring businesses spread to EU

bankruptcy imageIn July this year we reported on proposals by the UK’s Insolvency Service for new legislation that would stimulate earlier intervention in companies in financial difficulties.
This month the European Commission (EC) would appear to have followed suit by announcing a similar initiative.
Both sets of proposals have similarities with the US Bankruptcy Chapter 11 system as a court process for corporate bankruptcy protection.
Among the UK proposals put forward for consultation were a three-month moratorium to prevent enforcement or legal actions by creditors, allowing for a breathing space for rescue plans to be prepared and considered and for businesses to continue trading during any restructuring and protecting continued supply of essential goods or services without being held “hostage” by suppliers.
The deadline for responses to the consultation on UK proposals expired in September 2016 and of the responses reported, more than two thirds supported the idea of the moratorium. The Government is now assessing the results.

The EC follows suit

The EC proposals are very similar to those proposed for the UK and aim to allow what it calls “preventive restructuring”, particularly aimed at SMEs and at harmonising insolvency practice across the EU member states.
EC First Vice-President Frans Timmermans said: “We want to help businesses to restructure in time, so that jobs can be saved and value preserved. We also want to support entrepreneurs who do fail to get back on their feet quicker, get out there and try again wiser.”
The EC proposals, now out for consultation, also identify the need for earlier intervention and action for companies in difficulty and also include a moratorium from enforcement action to allow for restructuring negotiations and protection from individual creditors trying to seize assets.
The proposals, according to commentators, are part of EC efforts to organise capital across Europe and seek to remove obstacles to the free flow of capital across borders.
Alignment of the UK and EU initiatives may be overtaken by the UK’s decision to leave the EU following the referendum in favour of Brexit but the proposals are still relevant for business and the restructuring industry.
Both initiatives, if introduced, should provide SMEs in UK or EU with at least some confidence that if they get into financial difficulties their efforts to restructure will not be further inhibited by complex negotiations with creditors and suppliers despite the different insolvency regimes throughout the EU.

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

Van delivery businesses operate on very slender margins

van delivery serviceCourier and other delivery services that operate using vans do not need one of the three main types of operators’ licences required in the UK if their vehicles have either a gross plated weight (the maximum weight that the vehicle can have at any one time) below 3,500 kilograms (kg) or have an unladen weight of less than 1,525 kg (where there is no plated weight).
Generally, one of three business models applies to these types of companies. They are either companies that have their own vans, or they are one-man van companies or two-man van companies.
In terms of labour the two-man per van model, which specialises in loading and delivering such things as furniture and white goods, is the most costly to run.
But in all three cases the full costs of operating the business are going up significantly because of fuel price inflation, exchange rate fluctuations and the incredibly competitive market in which it operates. And the cost of vans and parts is likely to rise since the recent change to exchange rates.

Can van delivery businesses become more efficient?

Efficient fleet management is key. We came across a case of a company operating its own vehicles that had agreed to a delivery deadline for the goods from their factory.
However, one item was not ready so the factory manager decided to send out all those goods that were ready then have the van deliver the missing item the next day. This doubled the transportation costs and as a result crystallised a loss on the order. The factory manager had simply treated the van as a convenience and not a cost to be managed. There were many alternative options but all too often convenience is chosen without regard to cost or efficiency.
Another problem faced by some delivery companies is that they are operating under a franchise model using self-employed drivers. The recent ruling against Uber is likely to significantly add to these companies’ costs because they will have to comply with employment laws and the pay minimum wage unless an appeal overturns the verdict.
A third issue is the cost of warehousing where delivery companies are receiving goods into warehouses for onward delivery or storage and calling off. This model introduces the additional burden of tracking goods and having an efficient system in place to manage both storage, retrieval and delivery. While this provides scope for adding value and charging a premium, it requires investment and training which are all too often ignored and lead to the business failing.
One area that seems to justify a margin is handling valuable or specialist goods such as art or glassware. While it can take time to build a reputation, the relationship with customers can change from simply being all about cost to developing a partnership.
Manufacturers however are often wise to outsource deliveries which will allow them to focus investment and training on their factory.  But like the first example, duplicated journeys are expensive so deliveries need to be managed.
As to the van delivery companies, the competition in the market is fierce and it is likely that there will be considerable insolvencies as costs rise. Survival and profits are all about systems and volume, or specialism.

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Banks, Lenders & Investors Cash Flow & Forecasting Finance Insolvency Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs

Current post Brexit insolvency statistics are no guide to the future

solvent or insolventThe latest corporate insolvency statistics released by the Insolvency Service for Q3 (July to September) show 3,201 liquidations slightly increasing by 2.2% from the previous quarter while 75 CVAs show a significant decline by 30.6% from Q2. The number of liquidations is broadly at the lowest level over the last 30 years since the previous peaks of 5,110 liquidations in Q1 of 2009 and 6,332 in Q1 of 1992.
Despite the above statistics which might suggest businesses are doing well, research carried out in mid-October by Pinsent Masons among Insolvency Practitioners (IPs) and published in Insolvency Today found that two thirds of the insolvency profession believe Brexit will contribute to an increase in the number of business failures in the UK over the next 12 months.

Uncertainty about the future is not the only pressure looming over businesses.

Arguably, loose monetary policy and low interest rates maintained by the Bank of England post the 2008 Great Recession may have preserved the life of many zombie companies. But given the increase in inflation revealed last month, and the forecasts of more to come, it may be that there will be no further room for interest rate reductions. Indeed, interest rates look likely to start rising, which might benefit savers but not businesses. Indeed, rising inflation combined with declining profits that many businesses are reporting raise the spectre of stagflation. Insolvencies can’t be far behind.

What other factors may affect business insolvencies?

Recent criticism of Mark Carney, the Governor of the Bank of England, by some members of the Government has led to concern about their relationship which leads to further uncertainty. While the Governor has announced that he will stay on for an extra year beyond his 2018 term it isn’t the full three years option that would have reassured the money markets.
Business confidence is key for the economy since it is a prerequisite for medium and long term investment. Investment in turn improves productivity which in turn justifies higher wages which leads to a higher standard of living. The focus on employment has overlooked the quality of jobs and prospects for employees to share in the spoils of improved productivity.
It remains to be seen how the forthcoming Christmas trading period will unfold and whether this, combined with new business rates which come into effect from April 2017 will expose the retail and hospitality sectors and their dependence on people having a level of disposable income.
In our view the signs are not looking good for those UK businesses with high overheads and low margins and those that have hung on since 2008 but still have high levels of debt to service.

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Banks, Lenders & Investors Cash Flow & Forecasting Finance General Insolvency Turnaround

Who are the winners from post EU Referendum £Sterling drop?