Categories
Employees Rescue, Restructuring & Recovery

Are you considering restructuring your business?

Are you considering restructuring your business?

Do your employees know?

You may think they don’t but don’t underestimate the efficiency of the staff rumour mill.

At a time when it is proving difficult to recruit key employees it is crucial in a restructure that you retain those employees that are going to be key to its success.

They will be essential to the business’ recovery going forward.

It is important to keep employees fully informed, and not relying on the rumour mill if you want them to put their energies into helping it survive.

Their opinions, feelings and concerns should be actively listened to. If they don’t know what is going on they are likely to be worrying about the future of their career and their jobs and more likely to be a flight risk.

Clarity will do a great deal to help employees to put their efforts into supporting the restructure to help assure their future.

Preparation and planning are vital for a smooth restructure. From the first phase, business leaders should ensure that employees are central to every decision made.

You have legal obligations too.

For contractual changes to be legal in a business that wants to change the contracts of more than 20 employees, a 45-day consultation period with staff must take place. This is also true if there are to be redundancies.

If you don’t comply it could add a delay to the restructuring proceedings.

Keeping your employees informed and engaged will go a long way towards ensuring a successful restructuring outcome and the future of the business.

Categories
Insolvency Rescue, Restructuring & Recovery

Restructure now rather than later

Corporate insolvencies rose by 32%, 1,964 in England and Wales in December 2022, according to Insolvency Service data, compared with the same period the year before.

A combination of high inflation and rising interest rates, poor consumer sentiment and increasing raw material costs is putting ever-increasing pressure on businesses and is expected to continue throughout 2023.

But insolvency, as we have said many times, does NOT have to be the end of your business.

However, you need to take action.  Ignoring the problem will not make it go away.

You can get help but you must be willing to be honest about the situation.

To help we have a free cash management tool for you to download here.

It will help you know exactly where your business is financially.

After that, the next step is to talk over your situation with a restructuring adviser.

K2 Partners is here for you and  happy to have an initial chat to understanding the issues involved in the next steps you may need to take.

Just give us a call.

We’re here to help.

Categories
Insolvency Rescue, Restructuring & Recovery

Can your business weather the current economic storms?

Should you restructure your business when it is not insolvent?

According to an article in the online publication The CFO restructuring should be viewed as a positive.

It suggests: “Companies where the underlying business is sound should look to navigate through the restructuring environment to mitigate against unsustainable debt burdens which have been brought about by the incredibly challenging economic headwinds…”

At the moment the economic situation is changing rapidly, thanks to the war in Ukraine, the energy crisis, rising interest and borrowing rates and increases in the costs of raw materials.

In the last week alone, one piece of research carried out by ACP Altenburg Advisory has revealed that interest rates over the next nine months are expected to cost businesses an extra £13.6bn annually in loan interest payments.

Investors have reportedly pulled a record £27.9bn from UK funds in the last month and according to the Insolvency Service insolvencies have risen by 40% in the last quarter compared with the same time last year.

It is a fortunate business that is not struggling in the face of this dire situation.

But if yours is one of them, it might be worth considering, as the CFO advises, restructuring in order to be in the best possible position to weather the coming storms.

“Early engagement and a proactive approach to restructuring options, even for the healthiest of companies, can result in very positive outcomes for a business. Such efforts do of course also form part of directors’ duties,” It says.

K2 Business Partners has many years of experience in helping companies to restructure and are always at the end of a telephone when you need us.

But your first step is to know exactly what financial position your company is in.

We have a cash management tool that can help you and it is free to download.

Download free cash management tool.
Categories
Rescue, Restructuring & Recovery Turnaround

Need someone to talk to?

We have been talking for some time about the mental health problems that might be affecting business owners and CEOs under the current stressful conditions.

Now, research by AXA UK and Ireland has found that nearly half of small business owners feel they have ‘nobody to confide in’ about their problems and the stress they are under.

This amounted to 48% of the 500 SMEs the research polled.

Claudio Gienal, chief executive officer for AXA UK and Ireland said: “It can be a very lonely place being an SME owner, which is why it is so important to ensure you can confide in someone who can relate to how you feel.”

While owners and CEOs may be reluctant to share their worries with staff, friends or family, there are people to whom they can turn.

Turnaround advisers, like K2 Business Partners, are very experienced in supporting, helping and understanding the worries and fears of those facing possible insolvency.

The name says it all. We are your partners in times of difficulty.

It only takes one call or message to start the process, but before you do, if you want to know more about how we approach turnaround and restructuring this recent post will help you.

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

One person doesn’t have all the answers

Being the boss of a business can be a lonely place especially when times are as troubled as they currently are.

The temptation is to present a positive front and mask the worries for the reassurance of colleagues and staff.

But the stress of this can take a huge mental toll.

Nevertheless, friends and family will notice signs that all is not well.

They include:

  • Snapping at people.
  • Losing concentration
  • Putting off decisions
  • Restlessness
  • Emotional volatility
  • Anxiety
  • Erratic behaviour

Being supportive, sympathetic and encouraging is obviously important but so is encouraging the person to get help.

Talking to someone can help to bring perspective and reduce a problem like potential insolvency to manageable proportions.

That’s where K2 comes in.

Tony Groom has a wide range of experience ranging from acting as CEO and CRO (Chief Restructuring Officer) of AIM listed companies including the turnaround of a regulated investment company; through to smaller SMEs with turnovers of below £1m

We specialise in offering practical help to businesses in trouble to help them to restructure if that proves to be the best option.

The first step is to book a free strategy and viability review with us to talk through your situation.

You can find out more here.

Categories
Finance General Insolvency Rescue, Restructuring & Recovery

Mixed messages a sign of the times

Mixed messages are abundant right now. For example, when trying to ascertain the health of the construction sector, the following messages have all come out in news reports over the last couple of weeks: 

  1. That there’s an increase in construction firms seeking help from restructuring experts as builders struggle with the soaring cost of materials.
  2. That there’s an increase of companies in “critical financial distress”. Begbies Traynor’s latest Red Flag Alert report that this has increased by 37% in the past year, with construction groups among the hardest hit.
  3. That UK housebuilding activity has returned to pre-pandemic levels, according to industry body, the National House Building Council (NHBC).

Could all these reports be true simultaneously?

Of course they can, given the financial crisis currently affecting the UK economy.

Furthermore, it’s likely that many industries, not only construction, are being hit by this seeming paradox.

It is not looking as though things will get better any time soon, and the stress and strain this puts on the mental health of CEOs, business owners and boards is considerable.

Our message is: look after your mental health whether it is taking time out for a walk in nature or talking to someone about your worries.

That’s where K2 comes in.

Tony Groom has a wide range of experience ranging from acting as CEO and CRO (Chief Restructuring Officer) of AIM listed companies including the turnaround of a regulated investment company; through to smaller SMEs with turnovers of below £1m.

We specialise in offering practical help to businesses in trouble, among them in construction, to help them to restructure if that proves to be the best option.

The first step is to book a free strategy and viability review with us to talk through your situation.

You can find out more here.

Categories
General Rescue, Restructuring & Recovery Turnaround

There are opportunities in even the grimmest situations

Research by the UK organisation Make UK has found that almost three quarters of UK manufacturers have reshored their supply chains as a result of the disruption caused by the Covid pandemic and more recently the war in Ukraine.

“Nearly half (42%) of manufacturers have increased the proportion of suppliers based in Great Britain, with further reshoring in the pipeline for over two-fifths of companies,” according to their report.

This, together with the change in consumer purchasing habits moving to more online shopping has dramatically increased the demand for warehouse space.

According to latest research by Colliers, industrial occupiers are in a race for space as the UK is experiencing the lowest level of supply ever recorded, with only 18.1 million sq ft left, due to demand for logistics units continuing to be driven by the structural change in consumer spending patterns. 

Colliers states that take-up in 2021 for industrial distribution warehouses of 100,000 sq ft+ reached 50.7 million sq ft, up 3.6 per cent year-on-year, a new record for the sector.

The Make UK research also found that “manufacturers are looking to increase or maintain their current investment into supply chain technologies over the next two years.”

Despite the almost-daily dire news on costs, recruitment, raw materials prices and so on it is clear that there are opportunities in adversity for some businesses.

Perhaps an existing business could pivot to meet these needs and at the same time strengthen its own future for growth?

Give us a call or message if you would like to talk to someone about restructuring possibilities for and investment in your business.

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

Insolvencies are rising fast

Insolvencies are rising fast

But don’t give up now when help is at hand

The insolvency service figures for the first Quarter of 2022 make grim reading with totals at their highest since 2012.

Of the 4,896 insolvencies in England and Wales in Q1 4274 were creditors’ voluntary liquidations.

The Begbies Traynor Red Flag alert put the number of businesses in “critical distress” as up by 19% compared to the same quarter in 2021.

All this makes grim news for businesses that have survived the two years of disruption due to the Covid-19 pandemic and despite considerable ongoing cost, recruitment and supply issues have been hoping for at least some improvement in their activity levels.

The most vulnerable, according to Begbies Traynor, are the hospitality and construction industries.

But businesses should not give up when there is help at hand. The sooner you act the higher your chances of survival.

We are experienced in assessing every aspect of a business and coming up with workable plans for restructuring your business to survive.

Why not book an initial call to talk through your options.

Contact us

Categories
Rescue, Restructuring & Recovery

A New Industrial Revolution?

How feasible is it to reshore our industries?

The Office for National Statistics has reported that the UK has suffered “significant challenges when acquiring and maintaining their stock”.

Well, no surprise there as businesses have been well aware that a combination of Covid, Brexit, higher energy prices, events like the blockage of the Suez Canal and, of course, now Russia’s ongoing war in Ukraine has disrupted the global supply chain.

But this week the paper CityAM is asking whether now is the time to bring manufacturing industries back into the UK, aka “reshore” them to ensure not only supplies of essential but also growth.

While not underestimating the challenge, the paper points out that the UK “is still the ninth largest manufacturing country in the world, producing £183bn of products and employing 2.5m people”.

Reshoring, it argues, will have benefits, including reducing products’ carbon footprint, reducing lead times and delivery costs.

It quotes the organisation Made UK which says that already “40 per cent of reshoring is returning from China, over 30 per cent from Eastern Europe and almost 20 per cent is returning from India.” 

All this is, of course, easy to say but much harder to turn into a productive and practical reality, not least how to finance it.

But if you think your business could benefit from a restructure or pivot to bringing it back on shore and eventually growth why not call us for a preliminary chat?

You can message us via LinkedIn or email or call for an appointment.

Categories
Cash Flow & Forecasting Insolvency Rescue, Restructuring & Recovery

Don’t despair, do what you can

How you can protect your business in the current difficult climate

As increased taxes, war in Ukraine and Covid staff absences continue to make the business recovery climate difficult there are worries that insolvencies will increase dramatically in the coming months.

Indeed, Begbies Traynor reports that the number of company insolvencies in February was 23% higher than the same month last year with county court judgements against firms doubling.

But there are some things you can do to mitigate the risks.

  1. Know your financial position. You need to be able to keep track of your finances to be able to take action. Our free, downloadable cash management tool will help you do that. Find it here.

2. Covid has not gone away. All the restrictions may have gone, but the pandemic itself has not. Protect your staff by 

  • Completing a health and safety risk assessment that includes the risk from COVID-19
  • Providing adequate ventilation
  • Cleaning more often
  • Asking people with COVID-19 or any of the main COVID-19 symptoms to stay away and enabling them to work remotely

3. Be aware of your responsibilities, especially directors’ liabilities. As of March 31 temporary restrictions on the winding up of companies were lifted. This means the legal regime governing insolvency has returned to its pre-pandemic approach. Our article here is not only about surviving during the pandemic, it contains details of directors’ duties in insolvency

And finally:

4. Share your worries; You can call or message us via LinkedIn or call for an appointment to discuss your business situation and find out how we may be able to help you.

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

A problem shared…

The start of April sees a number of additional burdens placed on businesses.

In addition to increased National Insurance contributions, there are the ongoing problems of supply chain issues and higher energy prices.

Also, the remaining temporary measures to protect insolvent businesses by restricting winding up processes have now ended and as of this month, businesses now have to pay back all VAT deferred in the period to June 2020 under pandemic reliefs.

As if all this were not enough, changes made to the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 in February this year put directors under increasing scrutiny from the Insolvency Service by extending its powers to investigate the conduct of directors of dissolved companies. 

This makes it harder for businesses to use creditors’ voluntary liquidation (CVL) process to close down an insolvent company.

a problem halved?

Many CEOs and directors struggle on in silence sharing none of their worries about the state of their businesses perhaps for fear of being seen as weak, or of encouraging predatory creditors to take action, or because they simply don’t know where to turn.

Whatever the reason, doing nothing is really not an option.

Talking to somebody trustworthy who is on their side can often help to reduce a problem to more manageable proportions and help to come up with solutions.

Insolvency does NOT have to mean the end of a business.  It is possible it can be saved by a radical overhaul and restructuring.

That’s where we at K2 Partners come in. Restructuring is what we do and we have many years’ experience of successfully turning around companies even where their directors have almost given up hope.

That’s why we say:

A problem shared is a problem halved.

To find out if there is a way you could pivot your business to survive and grow why not message us, email or call to discuss and clarify your ideas? 

What have you got to lose?

Categories
Insolvency Rescue, Restructuring & Recovery Turnaround

Insolvency is not the end of the business story

Figures just released by the Insolvency Service showed a 33% increase on the number registered two years ago, just before the pandemic.

The IS report also identifies a 73% two-year increase in creditors’ voluntary liquidations, where bosses elect to place their company into liquidation in order to pay its debts.

But is insolvency really the end for a business?

There are four main definitions of insolvency:

  • Unsatisfied statutory demand: failure to deal with a statutory demand
  • Outstanding judgement: failure to pay a judgement debt
  • Cashflow test: when the company is unable to pay its debts on time
  • Balance sheet test: when a company’s liabilities are greater than its assets

But no, this doesn’t mean the end of a business although it is an indication that decisive action is needed. This can involve either turnaround, transformation or possibly a pivot of the business.

Turnaround usually involves making an existing business more efficient and generally this will involve cutting costs which can involve brutal downsizing if a company is losing money. The focus is on existing activities that are profitable and perhaps returning to the core business.

Transformation involves revisiting the business model or product/market mix.

The pivot process involves keeping some essential elements but everything else will be changed.

Deciding which is the best for your business will involve a close examination, a strategic review. A business needs to be sustainable and profitable so firstly you need to identify the resources that are already available to you and these can be divided into physical resources, human resources, intellectual resources and financial resources.

There is more on this in our post here.

Banks and other secured lenders are always significant stakeholders in any company and the loss of bank support usually represents an existential threat to the business.

So your relationship with your bank may prove to be crucial and our Board Briefing may help you assess this.

K2 Business Partners are hands-on investors and turnaround specialists whose aim is to ensure your business’ survival and growth. Obviously, there has to be at least a possibility that your business can be made viable, so our first step is to do an exhaustive review of every aspect, from finances and liabilities to processes.So don’t despair. If you would like to find out more why not book a discovery call to talk to us. Book a call.

Categories
Banks, Lenders & Investors Interim Management & Executive Support Rescue, Restructuring & Recovery

Why not call on some fresh talent and investment?

As if businesses did not have enough to deal with as they strive to get their businesses back on track following the turmoil of the last 18 months now there are predictions that interest rates will have to rise to damp down inflation.

The Bank of England (BoE) governor, Andrew Bailey, has been reportedly arguing for the move arguing that forecasts of inflation rising to 4% if they should happen are twice the 2% target set for the BoE.

Is this the last straw?

It could be for those businesses paying back covid- loans if those loans were not given at fixed interest rates.

You don’t have to lose your business, however.

While there is no denying that restructuring a business can be challenging for its board and founders it can be a better option than throwing in the towel, provided you get the right kind of help.

Unlike other restructuring experts we at K2 have a history of building a portfolio as owners rather than remaining as just advisors. We focus on buying companies in distress to grow for our own portfolio and we have 20 years’ experience of doing this.

The emphasis is on Partnership, hence our name. We are with you for the long haul.

Obviously, there has to be at least a possibility that your business can be made viable so our first step is to do an exhaustive review of every aspect, from finances and liabilities to processes.

You can use our free cash management tool to itemise the details of your business’ financial circumstances to help you to provide us with the information we will need.

https://www.linkedin.com/smart-links/AQG7fCQTtXx4Zw/0a02193a-12a8-432b-8b19-81bc4f8a8b74

Categories
General Insolvency Rescue, Restructuring & Recovery

It’s good to talk

In tough and painful situations it can be tempting for business owners to struggle on, or live on hope, rather than acknowledging that it’s time to call in help.

It can lead to sleepless nights and a reduction in your ability to get a grip on the situation or make sensible decisions.

It will not solve the problems of mounting debt, the threat of County Court Judgements (CCJs) and insolvency.

K2 is here to take your calls if you’d like to talk to a real human being with experience of rescuing and turning around businesses.

Get a grip!

The first step to resolving business problems is to know exactly what the situation is.

We have a number of free tools for download that can help businesses to get a grip on their situation.

They include our Cash Management tool: https://lnkd.in/gr4bkxW

And if things have gone further there is our Guide to dealing with CCJs: https://lnkd.in/ghPgehx

So banish those sleepless nights and worries and get in touch.

Remember the old adage: “A problem shared is a problem halved”.

Categories
Interim Management & Executive Support Rescue, Restructuring & Recovery Turnaround

Turnaround Options – Can the business be saved?

Thank you to Carol Baker for including us in her article ‘Business Recovery Part 2: Turnaround Options – Can the Business be Saved?‘ for AccountingWeb.co.uk.

Business Recovery part 2: Turnaround options – can the business be saved?

By Carol Baker

In our first article in this business recovery series, we looked at how you can spot the warning signs that a business may be struggling and offered practical advice on how to support clients at risk of failing. In this second article, we’ll look at how a turnaround specialist can offer an alternative to insolvency.

Many accountants make the mistake of thinking that to turn around a struggling business you must enter a formal insolvency process. This is not always the case as Mark Blayney, turnaround specialist at K2 Partners explains, “Turning around a business is more than just restructuring the balance sheet – it is about strategy and reorganising the whole business to make it into something that is viable going forward.”

“The danger happens when directors say, ‘Let’s go into a Company Voluntary Arrangement (CVA) and write-off 75% of the value of our creditors’ believing they have turned the business around. No, you haven’t turned your business around, because you have failed to address the fundamental underlying problems which got you there in the first place.”

It is important to distinguish between the ‘company’ and the ‘business’. Often a business can be saved, but not always the company’s legal entity, especially when there are conflicting interests amongst the directors which have brought the company close to insolvency.

At this point, the question becomes ‘Can the business be saved?’

A turnaround specialist is like a polymathic crisis manager who has a deep and complex knowledge that they can call upon to solve specific problems, and to do so – fast!

They have a unique ability to come into a business and take hands-on responsibility for delivering the actions required. This means in the early crisis management stages they have to quickly analyse the situation – often having to work with inaccurate and incomplete data – and use their intuition to make decisions. 

These decisions need to be made without emotion or influence from shareholders, directors or management. The highly analytical mind of turnaround specialists gives them unique behavioural skills and a management style which oozes creditability and trust. They bring calm to what is often regarded as chaos, but this stabilisation is only the first step. Real turnarounds then require rebuilding and reorganising the business for secure growth.

A two-step process for business turnaround

Whilst some turnarounds can be done with the company name and the business intact, at other times, the ‘business’ may need to be put into a new vehicle – simply because there is too much baggage associated with the company. But ultimately, turnaround is all about transforming the business including its strategic focus and operations.

First, there is the stabilisation phase – getting more cash into the business to pay staff wages and provide immediate working capital. A turnaround specialist’s first priority is to quickly get control of cash and cashflow such as finding non-essential costs to see where cash is being diverted unnecessarily, and produce a comprehensive (and tested) cash management forecast that identifies the areas which are fundamental for the business’s survival and growth.

“As independent advisers, turnaround specialists don’t have the emotional attachments that directors have, so it is easier for us to go to a lender or creditor and negotiate a repayment plan,” says Tony Groom, turnaround investor at K2 Partners.   

“Not only is this preferable to the director giving a personal guarantee – but suppliers are normally paid on a proforma basis, while a payment plan for old debt reduces the exposure, and secured lenders receive ongoing reports about the business and the turnaround initiatives as to reassure them about continuing with their support.”

A greater awareness of the funding tools available   

“We work with a range of funding solutions and have a deep knowledge of the market and where to source finance,” continues Groom.  “As such, we are well placed to advise directors how to facilitate restructuring of the debt by selecting the right financing option that will free up cash, reduce costs, and set the business back on the path of profit – often to the delight of all stakeholders.”

It is during this phase that the turnaround specialist will produce a ‘three-way forecast’ consisting of cashflow, profit & loss and balance sheet. From this, the turnaround specialist can see the predictions unfolding and how the core business can be strengthened.

Returning a business to growth

The second phase of turnaround is the growth phase, and this still requires a real hands-on approach by the turnaround specialist. “You have to get into the real nitty-gritty of the business to find those parts which really work and do more of the same; but more importantly, stop doing those parts of the business which don’t work,” says Blayney. “This trial and error approach becomes the basis of ongoing restructuring while at the same time growing the business.”

During the transformation, every aspect of the business needs to be addressed.  This involves looking deeply into the operating procedures and systems across the whole of the business, such as looking at whether the marketing strategy and promotion initiatives are right for the business; and whether it has in place the right IT infrastructure and software to handle the growth. 

As Jeremy Blain, CEO and author of ‘The Inner CEO – unleashing leaders at all levels’ says, “Many businesses are crying out for a new business model to help them successfully transform and propel them into a prosperous and exciting future. With many organisations restructuring, especially around digital, it is even more important that executive leaders’ have a more collective approach to leadership and business health.”

Successful turnarounds require collaboration

After the impact of Covid-19 turnarounds are becoming an all-too-familiar part of business life, the key is to devise a structure that will keep the reviving business nimble enough to compete. 

Implementing a turnaround relies on the clients’ existing accountants working with the turnaround specialists to look after the long-term interests of their clients, and as the adviser being the sounding board for their clients while turnaround specialists perform their magic. 

It also requires the cooperation and support of all parties – the board, management team, staff, customers, suppliers, lenders, and the turnaround specialists working together. It must be a team effort, and there must be a commitment to follow through on the actions necessary from all parties if the turnaround is to be successful. But when that doesn’t happen, and the business can’t be saved, then the only option is formal insolvency – which will be the subject of our next article.

Categories
Rescue, Restructuring & Recovery

Leaner, fitter and facing the future with confidence?

As lockdown restrictions are gradually eased businesses will be preparing to increase their activity.

But how many of them will emerge as very different organisations from the ones they were at the start of the pandemic?

Some have already changed their offering or target markets to meet the changed conditions, like the marquee rental company that pivoted to offering equipment to clients needing extra space for temporary canteens, classrooms or even warehouses.

The pandemic has forced many businesses to look more closely at their offerings, their processes and the way they work for the longer term.

These already include including switching to using remote working and intending to continue wherever possible, thereby reducing both their office space and their overheads. Manufacturers are likely to automate production lines and introduce AI and robotics.

There will be more investment in internet-based technology, remote staff surveillance to cloud storage and enhanced security systems.

Economists argue that all these changes could lead to a significant rise in productivity after years of being sluggish.

There will also be more investment in R and D and in training and re-skilling staff to be competent in managing new processes.

Categories
Business Development & Marketing Rescue, Restructuring & Recovery

Stronger together?

It is possible that merging with or acquiring a rival business may be the key to survival in the future.

A key issue a board needs to face in the current circumstances is to develop an M&A strategy for the business to address as appropriate both: 

  • Ensuring survival requirements, and 
  • Taking advantage of growth opportunities. 

The initial questions that need to be considered are:

  • What is our objective of the proposed merger / acquisition activity?
  • How are we going to identify appropriate targets and terms to meet these objectives? 
  • How are we going to manage the process?

You can find out more in our latest Board Briefing 👇🏻

Categories
Banks, Lenders & Investors Rescue, Restructuring & Recovery

Welcome relief for manufacturers uncertain about investing in new plant and machinery

A welcome relief for manufacturers uncertain about investing in new plant and machinery.

The Chancellor has confirmed the temporary £1m tax relief (up from £200k) on investments in plant and machinery has been extended by a year to January 2022. 

Recent announcements about restrictions continuing at the same time as those about vaccines give us hope but make it difficult to plan. While the timeline for resuming normality is unclear, what is clear is that business will continue. For this reason plans need to be made; the only question is when they should be implemented.

Such plans might include financial restructuring but should look to the future. No business can stand still, despite the current uncertainty. 

Is it better to take a chance on less than 100% certainty of an outcome than to wait for certainty? Traditional research and scenario modelling is useful heuristics can help. Our Board Briefing “Decision-Making in Times of Market and Economic Uncertainty” on the topic might be useful.

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

Will proposed relaxation of planning laws revitalise construction?

Last month the Government announced that it would enact legislation to relax planning laws so that full planning applications will not be required to demolish and rebuild unused buildings making it easy to convert commercial and retail properties into residential property. This could be the key to a swift revival of high streets and town centres by repurposing existing property.

If approved these new rules should come into effect in September.

The Government is also proposing to reform England’s planning system, it claims, “to deliver more high-quality, well-designed homes, and beautiful and greener communities for people to live in.” although the details have not yet been made public.

On the face of it, if the rule changes do become law this will be a significant boost to construction and building companies and suppliers, like us, of building materials.

Presumably, also, developers could benefit from a relaxation of the planning conditions that often accompany such projects, whereby local authorities can make planning consent conditional on the provision of a proportion of affordable housing or other community amenities via a Section 106 Agreement.

In answer to concerns raised by such bodies as the Council for the Protection of Rural England (CPRE) and the Local Government Association (LGA) that it will lead to a decline in standards, the Government has said that the measures are designed to cut out bureaucracy “to get Britain building” but will also protect high standards: “Developers will still need to adhere to building regulations.”

It has also pledged that pubs, libraries, village shops and other buildings essential to communities will not be covered by these new flexibilities. This will help avoid the decline of village and community life by preserving local amenities although most local libraries and many pubs have already closed.

Although a controversial initiative, we believe this would be a welcome boost for construction and associated industries and for employment through the jobs it will create. What do you think?

Has your business struggled as a result of the Coronavirus Pandemic? Are you having to consider redundancies as the Furlough measures are scaled down?  

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

Is it likely that there will be a permanent change in people’s behaviour post lockdown?

post lockdown behaviourHow people’s behaviour might change post lockdown is something that may be crucial for SMEs in planning ahead.
While it may be a long time yet before the Covid-19 lockdown is removed completely, following the Prime Minister’s briefing at the weekend, the process of relaxing the lockdown restrictions is now underway.
Despite the financial support that has been provided to businesses and workers it is becoming clear that we shall not return swiftly to a pre coronavirus level of business for some time and before we do many businesses will not survive, especially if the recovery takes a long time and the post lockdown landscape is substantially different.
Much depends on businesses’ ability to recover, on how long it will take them to recover and on how much people will change their behaviour as a result of the crisis.
A key to business survival is communication by leaders to deliver the information and direction everyone needs when a large scale crisis hits. While they are unlikely to know the answers, leaders reassure everyone by sharing facts and the rationale for decisions in a way that allows them to change direction as the crisis unfolds and more information is available. Essentially they need to be agile.
A PwC investigation of leadership behaviour during a crisis suggests “When disaster hits, an all-hands-on-deck, everyone-to-the-rescue reaction is understandable — but such good intentions will most likely lead to a chaotic response.”
The website emergency cdc emphasises the importance of clear, simple messaging from the start: “Because of the ways we process information while under stress, when communicating with someone facing a crisis or disaster, messages should be simple, credible, and consistent.”
Messages should be repeated, be supported by a credible source and be specific, it says, and should offer a positive course of action.
To this extent, this is exactly what the UK Government has done with its repetition of the simple message “stay home, protect the NHS, save lives” and its daily briefings reiterating the message as well as giving updates on the numbers of cases that justify the advice.
That it has been doing its job, perhaps almost too well, is indicated by the findings of an Ipsos Mori poll in early May that “two-thirds (67%) of Britons say they will feel uncomfortable going to large public gatherings, such as sports or music events, compared to how they felt before the virus.”
However, things become more difficult as the messaging changes, especially when it becomes more nuanced as we are seeing with the change of message to allow for a partial relaxing of the lockdown rules.
The proposed new message “Stay alert, control the virus, save lives” has already been rejected by the UK’s devolved governments (in Scotland, Northern Ireland and Wales) as being too vague as well as being perhaps premature given the continued high numbers of positive diagnoses being reported. Indeed, the Evening Standard last night reported confusion over the “back to work for some” message that led to commuters being packed on the London Underground.
The packed tubes may be linked to other reports that the country’s transport infrastructure is operating at only 10% of its former capacity post-lockdown. The biggest four trades unions have united to warn that people should not be going back to work without adequate safety measures in place and despite the troubles in the High Street retail sector, the British Retail Consortium has also warned against allowing shops to open without clear and adequate safety and social distancing rules.
In addition to any return to work message, different age groups are interpreting the message differently with many young adults going out to meet each other while older age groups remain at home.
The longer that the return to post lockdown normality takes then the more likely it is that people will change their behaviour permanently.
It is becoming clear that it will take quite a long time before everyone will do all those things that they did before Covid-19 appeared so a return to normal is a long way off.
Therefore, it is highly likely that there will be a permanent change in many people’s behaviour post lockdown.

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

Is it time to introduce more resilient business systems for post-lockdown?

business systems need to become more resilientJust in time (JIT) business systems of supply for everything from supermarket stocks to manufacturing components and raw materials have been the dominant model for some years.
While it offers huge benefits, including less storage space needed and less capital tied up in stocks, the disruption caused by measures to contain the coronavirus pandemic has revealed some major flaws in the model.
When such an integrated global supply chain breaks down as has happened recently the impact on business is considerable where shortages of stock have arisen due to road, sea and air freight grinding to a near-halt.
Indeed, JIT relies on many different components arriving on time often from myriad sources such that any one item can bring all production to a halt. The current situation has magnified the vulnerability since all the different supply chains will need to be fixed before production can resume..
Systems resilience describes a system’s ability to operate during a major disruption or crisis, with minimal impact on critical business and operational processes and the pandemic has revealed that in many cases it has been sadly lacking.
While many businesses have ceased to operate as a result of the pandemic, thus reducing demand for some categories of stock, there will come a time when those that survive will need to resume, and where different business systems may need to be developed to make the production more resilient and perhaps protect it from future similar shocks.
So now is the perfect opportunity for businesses to consider how to make their business systems and models less vulnerable in the future.
Firstly, this will take a change of mindset away from profit at all costs towards sustainable profits that factor in risks and resilience rather than simply focusing on cost reduction. The profit at all costs mindset has many short comings, not just vulnerability but safety also and was a causal factor behind the Piper Alpha Disaster that led to 167 oil rig workers dying.
It is also interesting that the US investor Warren Buffet, of Berkshire Hathaway, has sold his firm’s entire holdings in the four major US airlines in the belief that the post-pandemic world is likely to be very different, saying “We will not fund a company … where we think that it is going to chew up money in the future.”
Buffet is widely respected for his investment skill over the decades, so it is worth paying heed to his decisions.
As part of the longer-term thinking about business systems, companies will also need to improve their balance sheets to help withstand future shocks like the banks have been forced to do since the Global Financial Crisis of over ten years ago.
However, business should also, in my view, consider the benefits to be gained from nurturing relationships with reserve suppliers as well as perhaps maintaining larger reserve stocks of those materials or parts they need to sustain productivity during interruptions to supplies.
It may be that this will mean larger onshore storage facilities than they have been used to, but while this might mean lower profits and lower dividends for investors in the shorter term, it will provide greater security for the business and its owners in the medium and longer term.
The so-called “new normal” is likely to be very different for businesses and economies as the restrictions on movement are gradually lifted and it is likely to be a considerable time before we get there, but arguably this is an ideal time for businesses to rethink their business systems and prepare for a more sustainable future on many levels.
 

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

Nurture your key relationships if you want to have a future after current crisis

key relationships are important for business survivalIt may seem premature to talk about what happens when the Coronavirus pandemic is over but SMEs need to think ahead and nurture those key relationships needed to ensure their business has a future.
Many of you have had to temporarily close your business and furlough staff due to Government restrictions introduced to try to slow the spread of the virus and many or you have seen your income plummet or cease altogether, with a devastating impact on your cash flow.
According to behavioural scientists it is natural to behave cautiously, even timidly, in the face of a threat, in direct proportion to its magnitude and to what is known about it. But amid the daily deluge of media updates, it is important to remember that we will tend to exaggerate the risk so the threat looms large in our minds.
So, it is perhaps natural to invoke a so-called “bunker” mentality in which self-protection overrides all else.
But as a business owner, no matter how dire the current situation, it is important you try to maintain a sense of perspective and remind yourselves that eventually some form of “normality” will return at which point you will want to be able to return to business profitability.
An essential element of this is what you do now, and key to it will be your relationship with employees, customers and suppliers.
In previous pandemic-related blogs I have talked about maintaining regular communication with staff, somewhat like the government’s daily briefings from No 10 to keep us all informed. This communication is key whether you have been fortunate enough to be able to carry on with staff working remotely, or whether you have had to take advantage of the Government’s furlough scheme for the time being.
Similarly, it is critical to maintain a level of marketing to stay in contact with customers and clients.  They may not be placing orders now, but staying in close touch with them, demonstrating concern for their interests and wellbeing, and discussing the future will help prepare for it.
In the same way, understanding the changing needs of customers may have helped you pivot, as those like some restaurants who now provide a take-away service and offer meal deliveries. This engagement will ensure your business pick up quickly when restrictions are eased.
Another of the key relationships that you will need to nurture is that with your suppliers. You will need them if you are to remain in business where non-payment during the lock down may have been necessary if you yourself haven’t been paid but ignoring them won’t be easily forgiven.
There is a salutary lesson in the action recently taken by New Look, whose CEO last week wrote to all suppliers suspending payments to suppliers for existing stock “indefinitely, cancelling orders for its Spring and Summer clothing lines and saying it won’t pay costs towards them.
In fairness, the company had been in difficulties as a High Street retailer due to the changing nature of customer shopping habits in the previous two years and had closed many of its branches.
However, the news was devastating to its suppliers who received such a brutal message, one of whom is reported as saying the action would “devastate smaller companies down the supply chain at a time when they need help the most”. There appears to have been no recognition or understanding in the letter that suppliers would be facing cash flow issues of their own.
A little empathy would not have gone amiss when communicating such a non-payment message to suppliers who will need a level of understanding to show how important they really are despite being unable to pay them and especially when wanting to do business with them again in the future.
Perhaps you could engage with them by discussing ways to limit the damage, either by offering staged payments, if you as a business can afford it, or by reassuring existing suppliers that you value them and will continue to work with them as the restrictions ease and life gets back to normal.
No matter how focused you are on your own concerns and worries at the moment, and I am by no means seeking to minimise their significance, you should also remember that if you don’t nurture your key relationships now you could put your eventual business recovery in jeopardy.
Help is available for SMEs dealing with the pandemic at:
https://www.onlineturnaroundguru.com/coronavirus-sme-support

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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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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 Business Development & Marketing Finance Rescue, Restructuring & Recovery

WeWork reminds us why we should not rely on charismatic leaders and the investment bank advisers who flatter them

WeWork corporate hubrisThis week the new management of WeWork the business space property rental company announced that it was preparing to axe 2,000, or 13%, of its workforce.
It has been calculated that up to 5,000, or a third, of the workforce will ultimately have to go.
This is the latest episode in an increasingly sorry saga, which last month saw its co-founder Adam Neumann step down as chief executive and relinquish control over the company. Mr Neumann also returned $5.9m worth of stock to the firm, which he had controversially received in exchange for his claim over the “We” trademark.
After announcing its intention to launch on the US stock market earlier in the year, the company, which has more than 500 locations in 29 countries, had to postpone its plans when its viability and corporate governance came under closer scrutiny.
The business, which was estimated to be worth some $47bn when the intended float was first unveiled has since had its credit rating downgraded by the ratings company Fitch to CCC+ with a warning that its liquidity position is “precarious”. Earlier in September, Reuters had reported that the We Company could seek a valuation in its initial public offering (IPO) of between $10bn and $12bn, far below the $47bn at the start of the year. This figure is very different to valuations proposed for the IPO work reported in the Financial Times as between $46bn and $63bn by JP Morgan Chase, between $61bn and $96bn by Goldman Sachs and between $43bn and $104bn by Morgan Stanley.
These values were despite WeWork reporting a loss last year of $1.9 billion from revenue of $1.8 billion, these figures almost double those for 2017.
The recent turmoil is no doubt behind the recent announcement by two of its large landlords in London who have said they will not be signing new leases with WeWork for the foreseeable future.
Yet, there are other companies operating similar business models, such as the UK listed IWG group that owns the Regus brand which reported a net profit of £106 million from revenue £2.5bn. Two other similar business would also seem to be doing well: The Office Group and The Argyll Club formerly London Executive Offices.
As for valuations, IWG’s market capitalisation is about £3.5bn which is far lower than those proposed for WeWork but as a listed company might be more realistic.
Another example of value for a similar business model is the sale in October 2018 for £475 of London Executive Offices that had been up for sale for two year sale after an initial valuation in 2016 of £700m.

Hubris eventually catches up

Much has been made of the character and lifestyle of Adam Neumann, not least the mixing of work and pleasure, which was also part of the WeWork culture, one that offered that will offered employees “every millennial-style benefit under the sun”, which may not be right for a property letting company.
He was famous for statements like “Our valuation and size today are much more based on our energy and spirituality than it is on a multiple of revenue.”
Clearly his character initially charmed the company’s Japanese investor SoftBank, which owns 30% of the company and whose reputation arguably contributed to the initial IPO valuation of $47bn.
However, since then, potential investors have questioned its opaque corporate structure, governance and profitability. They have also questioned the links between Mr Neumann’s personal finances and WeWork.
The whole sorry saga, I would argue, is more about the initial credulous nature of the company’s investors and their belief in Mr Neumann, and less about a business model which has worked well for other similar companies. And the investment banks haven’t helped.

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

Recession, imminent or not is it time to ban the word?

recession storm cloudsRecession is a word that has immense power, striking apprehension into the hearts of businesses, politicians and consumers alike.
Talk of a recession can also precipitate the very economic conditions that are so feared and it is worrying that the word is currently appearing regularly in the daily news media.
But is recession a useful concept especially in the context of increasing pressure to move to sustainable, rather than perpetual, economic growth, in order to combat climate change and global warming?
Should we keep growing?
The generally-accepted definition of a recession is, according to the Business Dictionary: a contraction in the GDP for six months (two consecutive quarters) or longer. It goes on to say: “Marked by high unemployment, stagnant wages, and fall in retail sales, a recession generally does not last longer than one year and is much milder than a depression. Although [they] are considered a normal part of a capitalist economy, there is no unanimity of economists on its causes.”
So, by these measures, the UK has its highest ever employment and rising wages and is not in recession. On the other hand, it is suffering from falling retail sales, apparently now online as well as on the High Street, as a result, we are told, of declining consumer confidence and worries over future job stability.
Clearly, an imminent recession has been a worry for some time, at least as far as the media has been concerned.
Over the course of the last two months, every time the latest confidence and productivity figures have been announced it has prompted speculation.
In early September, the Sunday Times reported data from MakeUK and BDO who both indicated falls in factory output and from the CBI (Confederation of British Industry) whose latest growth indicator showed a continued decline in services and distribution volumes.
Later in the month these same two bodies were reporting that domestic orders in the UK manufacturing sector had declined in the third quarter for the first time in three years as well as reporting weakening export orders.
Purchasing managers’ monthly indexes from IHS Markit/CIPS throughout the month showed declining confidence in the services, manufacturing and construction sectors.
And so it went on until by the start of October, the Guardian was claiming that a recession was on the way.
In view of the persistent pessimistic data one might wonder how we are not in a recession.
It might be explained by the alternative views based on other data. For example, the Economist carried an opinion piece that pointed out that the last two recessions, between August 2000 and September 2001, and then in 2008, had been as a result of “epic financial crisis” accompanied by stock market crashes.
It then argued that a recession was as much a matter of mood as it was of any reliable economic signals and signs.
Meanwhile on September 27 David Blanchflower, Professor of economics at Dartmouth College in the US and member of the MPC (Monetary Policy Committee at the Bank of England) from 2006-09, argued that the UK was already in recession, even though the conditions for the technical definition had not yet been fulfilled.
Ah, so it is down to the definition of recession. Is a recession now like news: fake or real? And what is a technical recession?
Blanchflower based his argument on the fall in “how businesses are doing on turnover, capacity constraints, employment and investment intentions” arguing that since GDP figures are actually regularly revised after their initial announcement they cannot be used as an indicator of recession.
Confused? That’s no surprise!
This is why I am suggesting that the widespread use of the term is less than helpful to businesses trying to navigate their way through the admittedly uncertain landscapes of imminent Brexit, global trade wars and political mayhem.
They would be much better served by focusing on their cash flow, balance sheets, growth plans and other data in order to remain sustainable and profitable, whatever the surrounding, feverish “mood music” of recession talk.

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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?

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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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Banks, Lenders & Investors Business Development & Marketing Cash Flow & Forecasting Finance General Rescue, Restructuring & Recovery

Chaos and Confusion or Order and Clarity? Where are SMEs now with Brexit Planning?

Brexit planning - which way?Brexit planning will continue to dominate the thinking and expenditure of the UK’s SMEs as Parliament is suspended for five weeks and the Government’s plans for leaving the EU on October 31 seem to be in tatters.
Parliament has forced the Prime Minister and cabinet to release its documents, called Operation Yellowhammer, on planning for a No Deal Brexit and has also blocked the possibility of the latter. Both are now, in theory, legal requirements as Acts of Parliament.  However, disagreement prevails.
It is questionable whether the government will obey the law, especially if they can find a way out. Furthermore, there is now no Parliament, or Parliamentary Committees, sitting to scrutinise the Government although the press and Courts are fully engaged.
Notwithstanding the political gymnastics, businesses are deluged with upbeat exhortations and alleged offers of help of which the following is a selection from the last six weeks or so.
Liz Truss, the then International Trade Secretary, described Brexit as a “golden opportunity” for UK businesses and Lord Wolfson, CEO of Next was reported in the Mail on Sunday as being no longer fearful of a no-deal Brexit now that Boris Johnson is Prime Minister. One wonders whether he is now preparing to eat his words.
Last week Alex Brazier, the executive director for financial stability, strategy and risk at the Bank of England, claimed the UK’s financial system will remain stable after Brexit.  Indeed, the BoE now claim a hard Brexit won’t be as disastrous as they previously claimed.
There have also been announcements of several offers of help to businesses with Brexit Planning.
The Business Secretary Andrea Leadsom has launched a £10m grant scheme for business organisations and trade associations to support businesses in preparing for Brexit ahead of October 31. The fund is open to business organisations and trade associations.
Barclays is to host a series of “Brexit clinics” in October and November, with the sessions designed to help its SME customers after Britain’s departure from the EU.
The Government also launched its own £100 million “Get Ready for Brexit” campaign designed, according to Michael Gove, to “give everyone from small business owners to hauliers and EU citizens, “the facts they need” to prepare for the UK’s departure from the EU on October 31st.”
Also, as I reported in July, the BCC (British Chambers of Commerce) launched its own Brexit planning  guidance.

Is all this Brexit planning help and guidance just “smoke and mirrors”?

There is some evidence from SMEs on the ground that their businesses are already feeling the effects of the long-running Brexit saga and that they still feel there is little clarity to help them with Brexit planning.
Last month a QCA (Quoted Companies Alliance) survey of UK small and mid-cap companies found that 59% said it had distracted them from running their business, 16% have invested less in the UK, 43% say that preparing for Brexit has had a negative impact on their company’s growth while just 24% felt the Government had provided adequate information although more than half had taken steps to prepare for the no-deal scenario as best they could.
The real effects on the ground are already being felt.
The value of central EU public procurement contracts secured by UK businesses fell by 30%, to €108m (£99m) in 2018, from €155m (£142m) in 2017, research by UHY Hacker Young.
The British Ports Association (BPA) has dismissed a £10m Brexit fund for English ports as “a tiny amount of money”.
The UK Food and Drink Industry has highlighted its worries about regulatory clearance required for selling animal products to the European Union, warning that there is a serious possibility that, come October, listed status will not be granted.
Towards the end of last month the Guardian described the impact it has already had on one UK company, a Bristol-based manufacturer of industrial safety valves. It reported that at one time its exports were growing fast, with 130 employees and eight apprentices training to high standards, but since the referendum things have quickly changed. According to the owner: “Some EU customers instantly decided it was too much trouble and switched to EU manufacturers – we lost 10% of the business.”
He reported that to continue to trade in the EU post Brexit he needs to obey rules of origin, recording every raw material, tracking every component, requiring “horrendous” new IT systems, his various valves containing 30,000 different configurations and “tripling our admin workload”.
Order and Clarity for Brexit planning? Not quite yet it seems.
So, my advice to SMEs who have to contend with this ongoing Chaos and Confusion remains as it was in July:
For the time being the sensible strategy may be to hold off on any major investment, to focus rigorously on management accounts and cashflow, and to ensure strategy and business plans are as flexible as possible to cover a range of eventualities. It might even be worth contacting a restructuring adviser as part of your contingency planning.

Categories
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.”

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.

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
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
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
Banks, Lenders & Investors Finance General Rescue, Restructuring & Recovery

Toothless regulators and unrepentant 'too-big-to-fail' banks

"too-big-to-fail" banksIt has to be said that since the 2007/8 Financial Crisis from which several of the “too-big-to-fail” banks had to be rescued by the central banks, SMEs have struggled to obtain loans and funding facilities from them.
There appears also to have been little in the way of retribution for those that caused the banks to collapse, although banks have since been forced to increase their capital reserves in an attempt by the regulators to avoid having to bail them out in the future.
Take RBS (Royal Bank of Scotland), which had to be bailed out and taken into public ownership, where it still partly remains.
There has been the emerging scandal concerning its treatment of SME customers who were transferred to its restructuring arm, GRG (Global Restructuring Group), with approximately 16,000 ending up insolvent and having to close down. No bail out for them!
After intensive lobbying starting in 2013 this situation eventually became the subject of a lengthy inquiry by the FCA (Financial Conduct Authority), which earlier this year published a summary of its findings, and “recommended” that the turnaround units in all banks be reviewed, and also the relationship between banks and insolvency practitioners, who generally act as their advisers when dealing with clients in difficulties.
The FCA only published its full report in February 2018 following pressure from the Treasury Select Committee. And then in July it announced it not taking any action against RBS or its senior managers over GRG’s behaviour “because its powers were very limited” and “there were no reasonable prospects of success”.
It also announced in early September that banks will face no further action over the interest rate swap mis-selling that contributed to the collapse of many SMEs and the financial difficulties experienced by many clients who had been duped by their banks.
More recently, despite assurances to the Treasury Select Committee given by RBS CEO Ross McEwan that he was not aware of any allegations of criminal activity, in late July it was announced in the Times that a former GRG banker was being investigated by Police Scotland over allegations that RBS had demanded “tens of thousands in cash” from SME owners in exchange for forbearance on their debts.
SMEs have also been advised to get on with any claims they wish to make against GRG before a deadline of 22 October 2018. According to business news website Bdaily, so far £10 million has been paid out in compensation out of a £400 million fund and there have been 1,230 complaints from a potential 16,000 SMEs.
It is little wonder that the CMA (Competition and Markets Authority) has found in a survey of business customers that RBS was rated Britain’s worst bank overall.
Yet despite all this, ahead of a briefing to challenger banks this week on a contest for £833 million of funding, provided by RBS to boost banking competition, Ross McEwan has been quoted as saying the challengers will struggle to compete against the Big Six in the face of their recovery from the consequences of 2007/8.
But this is not all about RBS.  Yesterday’s Financial Times reported on the behaviour of Lloyds Banking Group:  “Not only did the bank seek to obstruct Thames Valley Police’s inquiries into the £1 billion HBOS reading fraud, it also prevented access to the key “whistleblower” Sally Masteron, author of the critical Project Lord Turnbull report, and then fired her because of the inconvenience of her report’s message.”
It seems clear that unless regulators like the FCA are given much more robust powers to take action against the banks, not only RBS, but all ‘too-big-to-fail’ big banks will continue to feel they can act with impunity.
How much longer before they precipitate another, albeit different, calamitous financial crisis?

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
General Rescue, Restructuring & Recovery Turnaround

Why whistleblowers can be a force for good in your business

not whistleblowersMany people are afraid to speak out when they discover wrongdoing or questionable behaviour in their workplaces for fear of the damage they may do to their careers and employment prospects since all too often they are often regarded as outcasts.
The recent high-profile revelations by whistleblowers in the Cambridge Analytica and Brexit campaign organisations have shown that, in these days of ubiquitous social media, those who were brave enough to speak out became the target of some high-profile abuse and attacks, some of them personal.
But if your business is one where a culture of speaking out is either frowned on or not encouraged it may well be missing out on information that could help it to improve not only its operations but also its values and reputation.

Make your business safe for whistleblowers

Employees are often in a better position to see when something is going wrong than its board members are.
So how can you ensure that you are alerted to behaviour or practices that could damage your business?
You need to make it clear that revelations of malpractice or ineptitude are welcomed and that your business culture is transparent and open to people being able to voice concerns in a responsible and effective manner.
Malpractice can cover a wide range of situations from bullying, theft, bribery, fraud and corruption to endangering people’s health and safety to misuse of company property as well as any attempts to conceal such misdeeds.
Ineptitude becomes a whistleblowing matter if it has an adverse impact on people and the business or if it relates to breaches of company policies.
It is therefore good practice to have a clearly-defined whistleblowing policy and to let everyone know it is safe to raise any concerns they might have and that allegations will be treated as having been made in good faith.
The policy should clearly state the procedures that should be followed when anyone identifies something that they feel ought to be reported. It should also set out the procedures for managers to deal with the matter and cover confidentiality and protection for everyone involved.
Confidentiality is an issue that is also covered by privacy law. Those making allegations should be encouraged to put their name on record although disclosure needs to be managed carefully. You should also identify an investigating director within your business with whom concerns can safely be raised.
If the whistleblower feels that they need it, it should be made clear that your business is happy for them to be accompanied by a trades union or other representative at all meetings and hearings.
The investigating director should be required to fully investigate the allegations and prepare a written report of the allegations, their findings and their recommendations, preferably with the involvement of your HR department.
The whistleblower must be kept informed of progress as should the person about whom allegations are made, especially if they are an employee.
If necessary, it may be appropriate to involve relevant outside authorities, such as the HSE or the company’s auditors and if necessary the police.
While the company culture should be one of trust such that employees who report a matter as a whistleblower should be believed, you should also be aware of their agenda. The investigation may reveal that the whistleblower is in fact the problem which is one reason why the investigations should be discreet and the confidentiality of all parties preserved. If a whistleblower does turn out to be the problem or they are using the procedure to pursue their own agenda then they should be dealt with under the company’s disciplinary procedure.
Whistleblowing is, however, essential when some people are wilfully blind to behaviour that ought to be addressed. An open and constructive approach to confronting and dealing with such behaviours is essential to a company’s values, culture and reputation.
A properly constructed whistleblower policy can encourage people to act in the best interests of your company and ultimately ensure your business reputation is not compromised.

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
Banks, Lenders & Investors Business Development & Marketing Finance General Rescue, Restructuring & Recovery

July Key Indicator: this month we investigate the future of Retail

the future of retail on the High StreetFew people can be unaware that the future of retail on the High Street has been in peril for some time.
There has been a seemingly endless litany of “big name” closures or attempts to restructure, from BHS and Toys R Us to Carpetright, M & S and House of Fraser to Maplin and most recently Poundworld.
But the retail sector encompasses not only physical stores on the High Street and on edge of centre retail parks, it also includes online-only operations, such as Amazon, eBay and Etsy and those retailers that have both online and physical shops like John Lewis and Lewins the Shirtmakers.
Nor should the small, independent niche shops be forgotten in considering the future of retail.
Clearly the preferences and behaviour of consumers is a key factor, but it is not the whole story, as I shall outline in this analysis.

The pressures impacting on the future of retail

Most of the difficulties facing the physical retail sector are well rehearsed.
They include escalating labour costs including wages, staff administration and compliance and the Apprenticeship Levy imposed on larger businesses since last year. These, along with the 2017 business rate revaluation that came into force in April and ever-escalating rents have had a significant impact on overheads for High Street stores, whether they are large chains or small independent SMEs.
Indeed, it has been argued that the rate increases have weighed disproportionately on the smaller retailers and, as I reported in a blog in May, the FSB has argued that the Government’s new online appeals system seems to have been designed to be hostile to business, 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.
Then, there are the landlords, although in fairness this term should also cover the many institutional investors representing such organisations as pension funds, which, arguably, need to maximise their revenues to protect the people they represent.
An equally well-rehearsed explanation of the difficulties has been the competition from online retailers, who do not face the overheads that come with a physical store and can therefore offer substantial discounts to shoppers.
This brings us to another key factor that affects the future of retail – and that is consumer preferences and behaviour.
Here, the convenience of online shopping at any time of the day or night as well as price competitiveness has been identified as the key factor in the so-called “death of the High Street”. But there is more to it than that.
As the TUC General Secretary Frances O’Grady, said: “Retail depends on customers having money in their pockets. One reason why some shops are struggling is because wage growth has been very weak.”
Not only this but, as was reported yesterday, an estimated 50,000 retail staff have been made redundant or seen their role put under threat since the start of this year. It should be remembered that these people are also consumers who are now likely to have less money to spend. In this context the recent collapse of Poundworld could be seen as a worrying development.
Not much discussed, but also worth considering is the strategy of local authorities and the planning process in town centres over the last 20 or more years. While cash-strapped councils understandably wish to maximise their revenue from business rates and are therefore likely to have been attracted by flagship “name” stores to anchor their High Streets, the results arguably have been an unappealing sameness to town centres such that it is difficult to know whether you are in Sunderland, Colchester or any other town you care to name. Another bugbear for shoppers is the cost of parking, also a revenue stream for local authorities where the cost is discouraging shoppers who instead go to out of town retail parks.

Can the future of retail in the High Street be revitalised?

Let’s look at consumer behaviour first. Shopping has always been to some extent a social activity and there are already signs that those authorities that have paid some attention to the appearance and appeal of their town centres may be reaping the benefits as markets, small, specialist independents and pop-up shops, together with more places to eat, have a coffee and socialise, appear. Municipal flower beds and baskets even, make shoppers feel welcome.
Equally, many shoppers will say that while they appreciate the convenience and cost saving of online shopping, there is no substitute for being able to examine and try on purchases.  This is where some innovative retailers, such as Next, have provided opportunities with click and collect options that allow customers to try on orders and if not happy, the shop will organise the return of goods for them. It also means that the shop can operate from a smaller space to cut its overheads.
Another change in behaviour among shoppers is to buying fresh produce locally and doing bulk shopping online or by car at large out of town stores. This is helping promote specialist and artisan shops that are close to where people live or work. The large stores have also latched on to this by introducing local concessions into their stores.
Many of the larger retailers that have found themselves in difficulties have also offered online and click and collect services.  However, there has also been an increase in the numbers that have tried to restructure, using the option of a CVA (Company Voluntary Arrangement) to renegotiate deals with landlords and thereby reduce overheads. While there are signs of some landlords opposing the use of CVAs, or imposing strict conditions, if agreed they do at least guarantee some continued revenue, albeit reduced, rather than landlords being left with empty property on their books.

A number of developments that may also help the future of retail

Recently, a think tank, The Centre for Cities, has argued that city centres should be diversified to include more offices and housing arguing that they are currently too reliant on retail, but also that if retail is to survive it needs customers to sell to, such as those working and living nearby.
The UK Treasury is also working on a fairer tax system to help High Street retailers, based on scrapping business rates and replacing them with a “turnover” tax.
In the US, a Supreme Court ruling has allowed states to collect sales taxes from retailers that aren’t physically based in the state, meaning customers will likely have to start adding taxes to their online shopping bills, while on June 19 in Belgium the European Commission held a conference to examine the future of retail and what can be done to help with the current challenges.
It is too soon to say what impact any of these developments will have on physical and online retail but equally, it is too soon to write the obituary for physical retail.
 

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
Cash Flow & Forecasting Finance Rescue, Restructuring & Recovery

An interesting insight into the psychology of accepting too much work

too much work and a heavy loadI have warned in previous blogs about the dangers of over-trading and the effects it can have on an otherwise profitable business.
Over-trading is when a company is growing its sales faster than it can finance or fulfil them, in other words, taking on additional orders when it can’t afford to service or fulfil them.
The impact on cash flow is often concealed by the growing profits from growing sales.
The assumption that you cannot turn down business and must accept all orders is normally based on a rational fear of either leaner times in the future or that your customers will go elsewhere.
However, the American author and trader psychologist Rande Howell has an interesting perspective on the causes of and motivation for over-trading.
He outlines this in his book, Mindful Trading: Mastering your emotions and the inner game, and on his website mystateofmind.com.
While acknowledging that there is a fear element, the decision-maker’s fear of missing out, he attributes this to their mindset as a hunter.
The business leader, or trader as he refers to them, has a bias to act and therefore to chase after sales.
This can lead to taking action out of boredom because the mindset is about making things happen. Inaction, and the suspicion that opportunities are passing by, is therefore uncomfortable but it can also lead to acting on impulse rather than reason.
Howell also points out that there is a biological imperative in this behaviour in that the brain rewards success by releasing dopamine, the “feel good” chemical. Add to this Testosterone, which is associated with risk-taking and you have the elements of a behavioural pattern that can lead to over-confidence and unconsidered behaviour.

The danger of acting on impulse rather sticking to the business plan

As I have said before a well-organised business ought to schedule work and know when an order can be easily fulfilled.
When planning for growth, the business should look carefully at its finances and have a clear idea of its capacity.
I have also advocated in the past my view that those businesses with more demand than capacity should, instead of building more factories or taking on more staff, consider selling their existing capacity instead of selling more services or products.
This can be done in two ways, either by pricing to manage demand or fixing prices but managing expectations. No one minds waiting if the quality justifies the wait, at least until a competitor offers a similar quality at a similar price but quicker. This sale of capacity allows you to focus on quality of both product and service and avoids taking on more fixed costs in a febrile market.
Honesty and self-awareness, what Howell calls mindful trading, can help to combat the psychological components that lead to risk-taking and can strengthen the confidence in sticking patiently to the growth plan.

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 General Rescue, Restructuring & Recovery Turnaround

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

Restructuring needs supportRestructuring a business can involve significant changes that can have an impact on all its stakeholders.
Usually, restructuring is associated with both financial restructuring and reorganising operations because a business is no longer viable. It may be that it is experiencing cash flow problems and heading for or deemed to be insolvent.
The wise business will act as early as possible once problems are identified and may call in a restructuring and turnaround adviser who will conduct a deep and thorough review covering its processes, products or services, its accounts and forecasts and its business model before suggesting a strategy that will allow it to continue trading and recover its position.
This may involve closing loss-making product or service lines, outsourcing some processes, renegotiating terms with suppliers, possibly reducing the workforce or the hours worked and, in some instances, changing the business model. The financial restructuring may involve rescheduling debts and in extreme cases using a formal process like a CVA (Company Voluntary Arrangement).

Who are the stakeholders in business restructuring?

Stakeholders are people and organisations whose interests are affected by the restructuring, or those who can influence them.
They therefore include a wide community including banks, creditors, credit insurers, directors, employees, owners (shareholders), landlords, new investors, suppliers, unions, and arguably customers. In some instances, the government, public and press might also be regarded as stakeholders, as is the case when the company is a large employer or a critical service provider.
For a restructuring to be successful the response and support of these people and organisations is likely to be critical to both approval of proposals and future success.
Directors need to speak with a united voice and be transparent with everyone if they are to get the trust of stakeholders for their proposals. They also need to find a balance between humility, taking responsibility for past failings, while at the same time providing leadership and direction for the proposed changes. If the company is facing insolvency as directors also need to subordinate their own self interests in favour of those of creditors and the company.
Rescheduling debts normally needs the approval of each and every creditor although a minority of dissenting or ransom creditors can be bound by using a CVA.
More important is to ensure ongoing supplies and support will be necessary. This support includes employees who might be poached or look for alternative employment, suppliers who might be wary of extending further credit, trade insurers, asset-based lenders who finance critical equipment, even customers who can take their business elsewhere.
The support of employees should not be taken for granted. While they may be fearful of losing their jobs and may be asked to accept some alterations to their remuneration, hours of work or the work they do, negotiating this can be fraught with complications since you will not want to demotivate them in the process. Notwithstanding the potential loss of morale and survivors’ guilt felt by those who keep their jobs when others are made redundant, employment legislation needs to be observed if costly tribunals are to be avoided. This is where employees’ union(s) or representatives can be useful and should be brought into the discussions as early as possible. Employees’ co-operation and support can make all the difference to success or failure.
The critical argument that should enlist the support of all stakeholders is that it is in their interests to support the business through the process of restructuring, however uncomfortable it might be in the short term.
The justification is likely to be survival, recovery and eventual growth of the business for the benefit of everyone in the medium and long term.

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

Are managers redundant?

managers redundant to corporate structureAll four of the UK’s big superstore chains, Sainsbury, Tesco, Morrisons and Asda, have announced plans to make significant changes to their staffing structures, mainly affecting store managers.
Department store, Debenhams, has also announced plans to cut its store managers by a quarter.
All the retailers said they were facing a more challenging environment, not only because of intense competition from budget retailers, Aldi and Lidl, but also because consumers were becoming more price conscious as well as changing their buying behaviour.
Sainsbury’s hope to save £500 million over three years, but, in common with the other retailers mentioned, also said the changes will introduce “a more efficient and effective structure”.
Stripping out layers of management is nothing new. It has been used as a favourite cost-cutting tool by businesses in the past, most notably in the 1990s.
In some instances, no one notices when a layer of management is removed, but in others it can leave a void, especially in those where staff have not been empowered to make decisions.

Removing layers of management can improve productivity

One of the most significant organisational differences between SMEs and large corporations is their flexibility and ability to communicate throughout the organisation.
On the whole, SMEs have fewer layers of management and this enables them to adapt more quickly to change and to discuss and communicate plans to all their employees. This flexibility can attributed to everyone feeling part of a team, and where necessary doing each other’s job. There is often no need to defer to a manager for a decision.
Larger organisations, on the other hand, tend to have much more complex structures with more rigid procedures. Communication normally passes from the top down, from senior management through numerous layers to the workforce. Where decisions have to be made this is still down to managers or decision-making committees. Everyone simply follows procedures.
This makes it hard for initiative and feedback up through the layers of management. The focus is on lean structures and optimal efficiency. However, this runs the risk of suppressing initiative and reducing scope for employee consultation. As a result, larger businesses are often unable to react swiftly in a world where the pace of change is accelerating.  
A flatter structure assumes even more rigid procedures albeit ones increasingly being overseen by workers instead of managers.
The challenge is to improve productivity while at the same time empowering staff by giving them scope for taking their own initiative. Or is the next step automation and self-service retailing?

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.

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

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

Are businesses waking up to the positive benefits of early restructuring?
a building in need of restructuringIn the weeks since the collapse of the facilities management and construction company Carillion, there has been a noticeable increase in companies announcing plans for restructuring.
Capita, the outsourcing company frequently used by local and national government, whose shares have recently dropped by over 50% has just appointed a new CEO to turn it around after finally admitting that it was in financial difficulties.
Other businesses that have come under the spotlight include M & S, which is to close up to 14 of its stores, the burger chain Byrons closing 20 of its branches as part of a CVA rescue plan, House of Fraser looking to negotiate rent reductions, New Look is working on a store closure plan, B & Q axing 130 head office positions, Jamie’s Italian that is doing a CVA and there are employee changes under way at Sainsbury’s, Tesco and Morrisons.
While the majority of recent announcements have been in retail, they are not exclusively so.
What is perhaps more interesting is that efforts to restructure large businesses seem to be happening earlier.
This can only be welcomed as the earlier a business realises that it is, or could be, heading for financial difficulties or insolvency, the greater the likelihood that it will survive, albeit as a slimmed down business.
It is the job of a restructuring and turnaround adviser to carry out a thorough review of every aspect of a business, its products, processes, cash flow, business plan and overheads to identify those parts that are healthy and those that are draining cash or depressing profits.
She or he will make recommendations on anything that needs to change, including those products or services that need to go, as well as those that have potential to grow. Some of this advice may be painful, but it is in the interests of the business to be open to advice and to act on it.
Remember, the restructuring and turnaround adviser is looking to save the business and it is in their interests to help it to survive and grow. They are not insolvency practitioners whose role is to realise assets for creditors.
It goes without saying that the earlier the restructuring process begins, the greater the likelihood of success.
Once a company has appointed an insolvency practitioner its prospects of survival are reduced.
There is a lesson here for businesses of all sizes, from SMEs upwards, and this is to be proactive in monitoring business performance, enlist the help of an experienced restructuring and turnaround adviser at the first signs of trouble and be willing to take their advice, however painful, if the business is to survive and return to profitability.
It is to be hoped that those subcontractors affected by the collapse of Carillion will heed this advice and enlist support sooner rather than later.

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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.

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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.

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

Business review complete? Time to review the marketing plan

Business horizon Marketing planThe next phase of the annual business review and subsequent decisions about plans for the coming year is to review the marketing activities, set objectivities and develop a marketing plan for achieving them.
The marketing review should give a clear indication of whether last year’s objectives were achieved and form the basis for setting new ones.
This is true not only for businesses that are intending to expand either their range of products or services, or to try to grow.  No business can hope to avoid marketing itself altogether.
Marketing is not only about hoping to generate more sales, it is also about keeping the business name in customers’ minds and about demonstrating its expertise and its good reputation in its particular sector or niche.

The components of an effective marketing plan

Accurate and detailed profiles of the target customers and clear goals about what a business wants to achieve are the basic building blocks for a marketing plan.
Marketing tools cover everything from the website to social media and e-newsletters to traditional “old school” advertising, PR and promotion using printed materials such as brochures and flyers.
Even if the bulk of business comes from personal recommendations, it is foolish to assume that ongoing referrals will continue. Maintaining relationships by marketing to referrers, influencers and introducers should be included in you plans and especially if you rely on them for work.
As part of the process there are a number of factors to consider.
The external economic climate, competition from new entrants into its market and technological change, to name but a few are all factors that can all affect a business’ viability and resilience and therefore should influence the goals and how to achieve them.
Past plans and continuing with old marketing practices should be challenged. Is it time to change? A website refresh?  Or more radically is now the time to sell via the website?
If your marketing relies on social media, what worked last year may no longer work. Facebook, Twitter, Pinterest and others online platforms regularly change their requirements. For example, Twitter last year increased the maximum length of Tweets, and Facebook narrowed down the criteria by which a business page could increase its reach to viewers.
If your marketing relies on emails or telesales then new legislation referred to as GDPR may render your database redundant unless you have obtained specific permission from each contact that you may contact them, specifically by sending unsolicited promotion emails or calling them. The deadline for GDPR compliance is 26 May 2018 so your plans ought to include soliciting OPT-IN permission from your contacts. I would advocate that the number of contact OPT-INs is a KPI and a useful way to measure marketing success. It might also be used for setting SMART marketing goals (specific, measurable, achievable, realistic, timely).
Clearly if the business plan for the coming year includes the addition of new products or services these will need to be incorporated into the marketing plan. It goes without saying that research is necessary to identify the customers for the new products. Is there a demand? How will the customers be reached? And many more questions that need answers before developing the plan.
Finally, there needs to be a system of regular monitoring of results against the goals the business has set. I have referred to goals being SMART as reviewing results against goals forms the basis for tweaking plans and developing new ones.
Finally, marketing plans should not be set in tablets of stone.  They need to be responsive to the results they are achieving so that they can be refined or adjusted if needed.

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

Productivity in an unsettled economy

productivity puzzleProductivity in both national economies and individual businesses is much scrutinised by governments, business commentators and business owners as an indication of performance, efficiency and economic health.
The basic components for calculating productivity are the level of output achieved compared with inputs and is normally reported in terms of labour output or return on capital employed or sales per square foot in the retail industry.
At national level improvements in productivity are used to indicate the health of the economy, so that the recent improvement of UK labour productivity in the three months to September by 0.9% announced by the Office for National Statistics (ONS) was welcomed, albeit national productivity is still way below its pre-2008 Financial Crisis level.
In the same way productivity is a seen as a measure of national economic health, so is productivity a measure of the health of an individual business.
It should be noted that the ONS measures output per worker, output per job and output per hour but not the cost of the output where investment in technology would improve productivity as measured by the ONS but it would most likely reduce employment which is hailed as another measure of national economic health.

Why is productivity so important?

In the 21st Century, and a volatile economic environment due to factors such as Brexit uncertainty, increasingly global competition and concerns about inflation, the cost and assessment of risks of investing in improving productivity are complex and all too often are easily put off by unexpected external factors.
The risk of putting off investment in improving productivity often results in service and product quality declining, costs increasing and time to market increasing.
Historically the location of manufacturing was determined by property, labour, energy and time to market costs where the costs of these factors are constantly changing, and new factors are making the equation complicated.
It is helpful to decide what factors are really important and therefore what should be measured and monitored in order to get the right productivity improvements. ‘What gets measured, gets managed’ and critically the choice will have an impact on short and long-term profitability and short and long-term cash flow.
The decision to put off investment in equipment and machinery for instance is likely to involve increasing borrowing and possibly redundancy costs which while great for long-term profitability and cash flow may be risky and may not be affordable if the redundancy costs are high.
At its heart, productivity relates to viability and sustainability. Competition in most markets is fierce and requires a degree of risk taking to stay ahead since falling behind your competitors in terms of productivity means you are less likely to survive.

How can a business improve its productivity?

For many companies a high wage cost was in the past reduced by offshoring or sub-contracting to low cost labour markets, but this introduced time and transport costs. But these benefits don’t last for ever and there comes a time when this model needs to be reconsidered.
A business can be regarded as a system of systems where labour interacts with equipment as a form of efficiency or labour-saving tools. The equipment can replace labour or make it more efficient by saving time. Indeed, robots can work three 8 hour shifts without much down time. However, they need developing, installing, setting up, monitoring and maintaining, most of which requires highly paid labour to replace the often low-paid workers that did the work before being replaced by robots.
IT offers huge scope for improving productivity through new systems, whether processing data, document management, accounting, communication, planning or monitoring activities. It all requires training and experienced people to operate it but the savings and increase in output tend to be huge.
Use of online services is also an area that is growing whether obtaining legal advice or processing litigation claims, accountancy services for instance to reconcile your accounts with your bank statements, using promotion and marketing platforms or myriad more services.
The use of flexible and zero hours contracts by some businesses to manage the peaks and troughs of work flow helps avoid paying for labour when it isn’t needed. This has an impact on gross profits and involves measuring productivity against variable costs.
Another area for investing in productivity is to review the need for managers and administrators. While they tend not to be directly related to the variable cost of production they are a direct cost and have an impact on net profits where measuring their productivity is against direct costs.
In addition to the focus on getting the right balance of labour and equipment, employee commitment is also key to productivity. Just look at the days lost to strike action by Southern Rail.
A motivated work force can have a huge impact on productivity. I am always impressed by the bin collectors who I now always see running between houses.
Training and investment in skills, rewards for performance, recognising personal needs for family support or career enhancement. listening to them and the working environment all add up to a workforce knowing they are valued and respected. It is unlikely to be all about how much they are paid although there are low pay thresholds where a lot of staff live from pay cheque to pay cheque such that a small amount of extra pay makes a huge difference. Whatever the means of motivation, it is all about respect for your people and how they feel valued.

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

Lenders are jeopardising businesses with their short-term thinking

It is often argued that banks’ and lenders’ impatience gets in the way of attempts to restructure and turn around businesses that might otherwise have a chance of survival.
This short-term thinking means that they are wary about agreeing to the use of Company Voluntary Arrangements (CVAs) to allow for the survival of insolvent businesses in a way that will benefit them as well as other stakeholders.
lenders short term thinkingClearly, banks and some creditors are dubious about the merits of CVAs, as in the current case of UK Toys R Us, whose creditors are due to vote on a proposed CVA this coming Thursday, December 21. If approved 26 stores will be closed and up to 800 employees made redundant. The rest of the business, however, will be saved and all creditors will be better off.
The Toys R Us situation is complex, and questions are being asked about the state of its pension fund, in particular by the Government’s Pensions Protection Fund (PPF) who are threatening to reject it, unless the company pays £9 million into the company pension fund. This might raise questions about preference, but I am sure the lawyers will deal with that. There are also questions about the tripling the remuneration for 2014 to 2016 for its former boss and an alleged waiver of loans to a company in the British Virgin Islands.
The other side of the argument is that CVAs allow businesses to implement plans for restructuring their finances and reorganising their operations to become viable without pressure from creditors. In turn CVAs result in fewer business collapsing and the preservation of more jobs.
This was the argument put by both the EU and the UK in 2016 in proposing the introduction of a three-month moratorium to allow insolvent companies to put together plans for restructuring as part of a review of current insolvency arrangements.
A similar argument was put earlier this month by Harold Tillman, former British Fashion Council chairman, when he called for US Chapter 11-style laws to give companies some breathing space.
The question is, would such protection result in both struggling and Zombie companies being restructured in a way that will benefit the economy?

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

What are the qualities and role of a leader in times of business crisis?

It is a rare business that will never face a crisis and it is estimated on average this is likely to happen every four or five years.
Aside from unexpected events, such as natural disasters, a crisis be anything from a financial problem to a massive data hack, to potential reputational damage arising from inept handling of customers or stakeholders or even a product liability issue.
Effective handling of the crisis situation is crucial to the company’s reputation and in some instances to its very survival.
While those affected by the crisis will most likely look to to directors and managers for guidance, they are unlikely to be effective without leadership and clear messages from their CEO personally.

How should leaders manage a business crisis?

eadership in a business crisisWhile it is important to have appropriate systems and procedures in place for crisis management leaders can only be effective if there is a clear strategy based on a careful assessment of the situation. Often this requires scenario planning well ahead of any crisis so that early action can be taken.
The directors and managers will not be speaking with a unified voice unless they are given clear direction by their CEO.
The CEO should set the tone, and this may include acknowledging that mistakes have been made along with clear guidance on what statements can be made publicly about what the business is doing to address the situation.
So, the first step is for the CEO to ensure that the directors and managers are delivering the right message.
To do this, a crisis management team is needed, one with situation specific skills to deal with the crisis and with the communication skills to get the CEO’s messages out to all stakeholders.
Empathy without emotion will help deal with those affected when people are scared and key people need to be involved so that decisions are made and implemented while at the same time acknowledging the fear and pain among those who are affected.
The CEO should remain positive and reassuring, dampening any understandable urge to resolve the situation immediately, which is not always possible. The steps that need to be taken should be understood and wherever possible communicated to all those affected as well as to those responsible for dealing with the crisis.
An effective leader needs to be both self-aware and have a large measure of self-control.
They will need to demonstrate an understanding of others’ feelings while at the same time remaining clear-headed and focused on dealing with the crisis. This will mean fostering teamwork to minimise conflicts among crisis team members, internal staff and external stakeholders and ensure everyone stays on track during the process of handling and overcoming the crisis.
The objectives of any crisis management project are normally to minimise disruption and minimise reputational damage with the aim of restoring normal operations as quickly as possible. However all too often a focus on minimising costs and apportioning blame gets in the way and leads to a consequential fall out and a long-term damage to reputation.
Leaders take tough decisions which sometimes will need investment of time and money in resolving a crisis rather than running scared themselves.

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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

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Banks, Lenders & Investors Business Development & Marketing Cash Flow & Forecasting Finance Rescue, Restructuring & Recovery

Short term thinking in business amid Brexit uncertainty

in the midst of uncertainty don't panicIt seems that hardly a day goes by without a new and negative headline about the UK’s decision to leave the EU and the prospect of an adverse outcome from the negotiations.
Here’s a selection from the Independent at the time of writing: “David Davis has conceded that Britain’s Brexit withdrawal agreement will probably favour the EU”, “UK financial watchdog warns bank moves likely to be irreversible”, and “20% of UK restaurants at risk of going bust due to Brexit”.
It is hardly scientific, but gives some flavour of the atmosphere currently dominating the headlines on the issue.
Whether business owners follow the news or not, it is hardly possible to be completely immune to the climate of uncertainty that is surrounding the process, not least because reportedly some 58 studies have been carried out on the likely impact of leaving the EU on various sectors of the UK economy, details of which the Government has so far declined to publish, allegedly for fear of jeopardising negotiations, but may now be forced to after a vote in the House of Commons.
What further pressure last week’s interest rate rise to 0.5% will put on businesses remains to be seen, but the prospect of further rate rises is unlikely to help any business struggling with debt repayments.
No wonder, then, that many businesses are putting growth and investment plans on hold and concentrating on short term survival.
But ultimately this is not a sustainable position to be in since the business that fails to innovate is unlikely to thrive or grow and stasis is generally seen as a forerunner to failure.

What can a business do in the face of continuing uncertainty?

The obvious is to say, “keep calm and carry on”.
But also, acknowledge that fear of the future can become a self-fulfilling prophecy that encourages short term thinking, caution and at worst frozen panic.  It is often the case that where some see only looming disaster others see opportunities.
So, we would urge businesses to do their best to look on the bright side, think and plan for at least medium term and do everything they can to keep their businesses in the best possible shape, from carefully managing cash flow and monitoring cost but at the same time actively looking for opportunities.
This may mean getting help from a restructuring advisor to thoroughly review all its operations and identify the strengths and weaknesses and suggest ways to transform, pivot, slim down or otherwise revise the business model and update processes in preparation for embracing the opportunities as they emerge.

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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.

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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.
 

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

How will struggling businesses cope with an interest rate rise?

According to the latest research into struggling businesses 79,000 UK businesses (4%) say they would be unable to repay their debts if there was even a small interest rate rise.
The research, carried out in June 2017 by the insolvency and restructuring trade body R3 said this was almost a fourfold increase on the 20,000 from September 2016.
With the latest insolvency statistics for July to September (Q3) due to be published on October 27 the numbers of businesses in difficulty will become clearer but there are signs that Brexit has contributed to an increase in the number of businesses struggling where interest rates will compound their problems.
Indeed, the signs are ominous as the Bank of England, many economists and investment managers have been predicting a 0.25% rise is likely in November 2017. And the Labour party has begun preparations for a run on the pound when they are elected.
Exactly struggling business closing downhow many struggling and zombie companies, able to service only their debt repayments, there are in the economy is not clear but what is clear is that many would be pushed over the cliff edge by even a small rise in interest rates.
 
 

How can a struggling business prepare itself for an interest rate rise?

Unfortunately, there will be many that have left it too late.
There are three considerations that must be confronted which are how to fund the business, how to repay debt and crucially how to service debt when rates rise.
A company finding itself in this situation may not necessarily be a failure or inept.  It could be that it has a legacy of debt despite being profitable. This may be down to historical investment introduce development or growth during favourable economic times. Many companies today are much smaller than they were where they have downsized to become more profitable and reduce the funds needed for working capital. For many the downsizing hasn’t been a one-off exercise but continual as a form of genteel decline.
But that does not make a business immune to market forces and preparations to face a change in circumstances takes time and honesty. Indeed, a lack of investment means that a lot of companies are not prepared for the future.
While there are several options for dealing with unaffordable debts by rescheduling payments or writing them off, sustainability and viability need more than financial restructuring. This means freeing up funds to invest in improving profits, product development and growth which becomes more difficult when more cash is diverted to servicing debts.
Dealing with this conundrum is not something any struggling business should undertake alone. It is wise to use the services of a turnaround adviser to review the business in depth, help develop a plan for restructuring finances and reorganise operations to achieve sustainability and growth. And to help the company implement the plan and deal with the ensuing negotiations.

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Cash Flow & Forecasting Debt Collection & Credit Management Finance Rescue, Restructuring & Recovery

Why do so many in the construction industry get into difficulty?

construction contractorWe have been experiencing a rash of main and sub-contractors in the construction industry coming to us for advice because they have got into financial difficulty.
It has become clear that those who contact us have not been managing the financial side of their business.  They generally pay wages, labour, sub-contractors and suppliers in that order but all too often not other bills, such as to HM Revenue and Customs (HMRC).
Another characteristic is that those who end up dealing with HMRC and debt collectors don’t tend to have good quality financial information.
It has also become clear that their suppliers have been tightening up on sub-contractor payments and this has been putting pressure on their cash flow.
Traditionally construction is a cyclical industry, where there are seasonal peaks and troughs as well as fluctuations in demand for building, often influenced by conditions in the wider economy.  For example, the demand for commercial building construction has been diminishing in the uncertainty over the outcome of Brexit negotiations, as businesses hold onto their money and cut back on investment. These factors impact on margins.
In the housing sector given the lack of availability it might seem that there was a continuing, high demand, but again, the available cash for projects is limited, partly because there is a lack of government cash and local authority power to build those homes that are most needed – at the affordable end of the market.
At the other end of the scale, the property market has slowed as householders economise in the face of rising inflation and stagnating pay, plus, again the Brexit uncertainty.

How can contractors manage their finances to ensure success?

The pressure of ensuring an adequate work flow can lead to a sense of urgency in bidding for jobs at the lowest price, risking making a loss, and in taking on more work or agreeing to projects that there is insufficient capacity to handle.
It is also easy to bury one’s head in the sand, such as hoping HMRC won’t notice non-payment of CIS, PAYE or VAT, or ignoring their demands when they do; never a sensible long-term strategy.
All too often contractors succumb to factoring their book debts instead of getting help when they experience cash flow pressure. This often means they lose control of their business the next time they are subject to creditor pressure or get into arrears with HMRC.
Contractors generally need external support to help them manage their finances and in particular help them stay in control of their cash flow.
When pricing and bidding for work, contractors should not feel under pressure to win tenders at a loss just to keep the work coming in. Instead they should make honest assessments of each project and include a margin for overheads and profit. All too often premiums are ignored. Fixed prices also need a risk weighted margin to cover delays and unforeseen costs. It may be better to remove risk by retaining the right to use variation orders to cover unforeseen costs, external factors and inflation such as increased sub- contractor costs. Another approach is open book with an agreed margin.
However work is priced, contractors should walk away from projects that are not profitable and where they have any concern about being paid on time.
Once a contract has been won the contractor should keep careful track of the ongoing external and prelim related costs and constantly monitor profit and cash flow, ideally by trade.
Ultimately, success in a fluctuating and seasonal market means tight control but also whenever possible putting aside a proportion of the profit from the busy period to offset the leaner time.
 

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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.

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County Court, Legal & Litigation General Rescue, Restructuring & Recovery

The costs to a business of dispute resolution

dispute resolution clashing antlersIn an ideal world, most SME business owners would like to think that their business is so efficient and well-run and with such consistently good relationships with customers and suppliers that there is no likelihood of any dispute arising.
In reality, with the best will in the world given that people can be volatile or even unreasonable it is wiser to be prepared for the possibility that a situation may arise that results in a dispute that has to be resolved.
If it happens the associated costs may be so great that the result could be business failure.
By costs, we are not only referring to money, though if in the worst case the dispute ends up in court the financial costs of lawyers and court fees can be high, and more so where a court ruling goes against the business resulting in awarding costs against it including the other sides lawyers’ fees.
Add to that the worry and stress, and the time taken in trying to resolve the issue and preparing for court. Dealing with disputes is both distracting and takes focus away from the business itself, quite apart from uncertainty of the outcome.  There is also the risk that litigation can spiral out of control. These are also costs.
Whether the dispute is small enough to be referred to the small claims court or something larger the outcome may be damage to relationships with suppliers or customers.
Too often small disputes spiral out of control with disastrous consequences for some but for many it is an unwelcome and uneconomic distraction.

Alternative forms of dispute resolution

There are two main routes that a business could follow rather than trying to settle things in court.
One is to appoint a neutral third party, acceptable to both sides. This person would help them both clarify the issues under dispute and negotiate a mutually acceptable solution. Once agreement has been reached the parties would draw up and sign a binding agreement.  This process is called mediation and is considerably less costly than dispute resolution in a formal court setting. It depends heavily on the skills and expertise of the mediator and the willingness to arrive at a consensus.
A slightly costlier, but still less so than a court case, is the process of arbitration.  Again, this depends on a mutually acceptable neutral person whose judgement will be accepted as being impartial.  Normally the disputing sides will be required to sign an agreement stating that the arbitrator’s decision is binding on them. The arbitrator will then examine the evidence, hear both sides’ arguments and then impose a settlement.
Either of these two alternatives must surely be preferable to ending up in the adversarial situation that exists in a court of law, not only for saving costs (both financial and otherwise) but ultimately in saving a business from the risk of failure.
Given the cost saving it may be worth reviewing the relevant clauses in contracts to make an alternative dispute resolution option binding instead of the standard terms used in most agreements that refer to court as the default resolution procedure.

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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.

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

The importance of a business review

carrying out a business reviewAt the very least a business review should be carried out once a year although sometimes it should be done more frequently, perhaps quarterly.
This is especially true when, as currently, the economic and business climates are so uncertain with a number of global and local situations in flux, especially in the current climate with inflation creeping up and the UK’s trading relationship with the EU being so uncertain.
At the same time caution should always be exercised in reading the signs and drawing conclusions from regular reviews, since the information gleaned may be subject to short term fluctuations rather than identifying the longer-term trends that might influence a change of strategy.
In addition to influencing strategy, a business review is a useful tool for assessing performance and making improvements to processes, systems or marketing as needed or identifying opportunities that may have been missed.

What should be covered in a business review?

The end goal of a review is to establish whether a business is performing satisfactorily or whether adjustments or something more radical is needed. Essentially, it is the business equivalent of the school student report for parents.
The review should bear in mind the current business plan and any previous reviews or analysis such as the last SWOT analysis (Strengths, Weaknesses, Opportunities and Threats).
It should review the goals that were set for the year and there should be some simple mechanism for scoring the results. It may be as simple as checking of goals have been achieved, exceeded or if there is a shortfall.
using a magnifying glass to look at detailA thorough review will look in detail at all aspects of the business, not just its financial position but also its systems and processes, employee performance, and sales and marketing performance in relation to defined goals that have been set for the year.
Indeed, surveying or simply speaking with customers to get their feedback and in particular their input on how any complaints were dealt with are also useful.
A review can also benefit from the input of staff. One useful way of achieving this is to carry out staff appraisals at the same time.
A key aspect of any review is to consider future opportunities and potential goals, in addition to those currently being pursued. This can influence research that might be carried out so it is available for incorporating into any future plans.
It is often said that no business can survive if it stands still, so a regular business review is an essential tool for setting goals and strategies for its future survival and growth

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

Businesses should beware of knee-jerk reactions

knee jerk reactionsBeing agile and responsive may be good business practice, but there is a fine line between this and knee-jerk reactions.
While the former can be described as considered responses to relevant data, the latter are more likely to be immediate, unthinking and emotional.
While some instant reactions may turn out to have been productive, overall the chances of such a decision working out well are not high and probably not the best way to run a business.

Knowing when prompt action is needed and when it is better to hold your nerve

Monitoring data on business performance, invoice payments, sales, responses to marketing initiatives and a wealth of other relevant information is, or should be, and integral part of running a business.
However, understanding what that data implies can be much trickier.
The key is to be aware of both the time frames and implications in order to draw reliable conclusions.
A good example is statistical information such as the monthly trends like the PMI/Markit index that reports on activity in the service, manufacturing and other sectors of the economy, or the daily ebbs and flows of the stock market.
Not only can statistics be selective, highly dependent on sample size and on the information selected for measurement, it can take several months before a trend becomes clear.
While some investors trade stocks on almost a minute by minute basis depending on the rise and fall of share prices for a company or commodity, this sort of short term approach to events is unlikely to work well for a business. Indeed, it is not the strategy pursued by investment guru Warren Buffet.
Another difficulty with the knee-jerk reaction is that it may rely on emotional factors, such as confidence or lack of it, panic, self-interest or a desire to win at all costs. This is when investors can lose by following the herd instead of holding their nerve and following the data.

The tools to use to avoid knee-jerk reactions

Any business that has done a SWOT analysis (Strengths, Weaknesses, Opportunities and Threats) to inform its business plan and goals will have some protection against unconsidered decisions. Although remember ‘SWOT SO WHAT’, the key to a SWOT analysis is use it as the basis for making decisions.
A second tool is the contingency plan that outlines possible actions and reactions for a variety of scenarios.
Using these in conjunction with analytical data gathered over a sufficient period, relevant to the nature of the business, will improve the chances of making decisions about change that will have the optimum outcome for the business.

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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.

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Business Development & Marketing General Rescue, Restructuring & Recovery Turnaround

Why would a business leader need a business mentor or a consultant ?

Successful businesses need leaders who can make decisions. Input from others makes it easier to make the right decisions first time, instead of wasting time on rectifying the wrong decisions.
All the most successful business leaders, including Mark Zuckerberg, Elon Musk, Bill Gates and Warren Buffet reputedly practice what is called the five-hour rule, according to various articles on inc.com.
It was a practice started by Benjamin Franklin, one of the USA’s founding fathers and authors of its Declaration of Independence and its Constitution.
It involves spending an hour a day either reading, reflecting or experimenting in order to stay well-informed as a business leader.
While it is clearly a good habit for a business leader to follow, whether they are the head of a SME or a large corporation, it can be lonely at the top and there are times when it can be important to have another person with whom to explore ideas and perhaps refine them into something workable before making a key decision.

Which to choose – business mentor or a consultant

businessman with business mentorA successful business is never static so there will always be new problems or opportunities confronting the CEO and, no matter how much attention she or he pays to learning and developing their skills, knowledge and ideas, there will be times when it will help to get specialist expertise as well.
The business consultant is likely to be more focused on the business and its success. Their approach is likely to be more formal and structured so it is important to choose someone who understands or has worked in a similar business environment as well as someone you can be open with.
This means asking some pertinent questions before choosing a consultant who is right for you and your business, such as their experience in business, their experience of the issues you want to deal with, qualifications, and asking for examples of their work.
It is helpful to have a written agreement with a consultant that includes frequency of meetings, objectives, milestones with dates, confidentiality agreement, charges and payments and how either party can terminate the agreement.
Mentors tend to focus on the individual leader, on their wellbeing and personal development. An arrangement with a mentor can be less structured, although it is still wise to define the frequency of meetings and expectations of the relationship on both sides.  It could be someone you already know, whose expertise and judgement you respect and who is willing to act as a sounding board for ideas, or it could be a more professional business mentoring service. The good mentor asks questions and invites reflections.
Having a mentor can reduce risk when considering options and making decisions. Mentors tend to explore the rationale for any decision rather than giving advice in relation to the options or the decision.
Both mentors and consultants help focus a leader on the main issues to be addressed and bring clarity and process to decision making. Do you have one?

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Business Development & Marketing Cash Flow & Forecasting General HR, Redundancy & Trade Unions Rescue, Restructuring & Recovery

Uncertainty and change may be a feature of the business future for a while

managers hiding after announcing changeIn so-called “normal” times no business can afford to stand still and hope to survive.
In the current economic climate following the UK’s general election, a precariously-balanced parliament with no party having a majority, and with the negotiations on leaving the EU yet to start, business will be facing additional pressures and uncertainties.
However, regardless the prevailing circumstances, change is likely to be a constant feature in business survival.
Change can be unsettling, especially for employees and therefore has to be managed effectively if it is not to cause disruption, lack of focus, worry and a consequent drop in productivity.

The key actions for helping employees cope with uncertainty and change

It is surprising how often employees pick up on potential changes in their workplace, especially tension among managers, even if they have not yet been informed.  Watching and listening is important to gauging how unsettled they might be.
Managers demonstrating concern and understanding about people’s feelings can reduce the feeling of powerlessness and that things are going to be imposed on them.
Anxiety among staff can become a source of worry, so a key ingredient in calming employee fears is to give them as much information as possible as soon as possible about any proposed changes the business may be planning.
In fact, it may prove even more productive to consult with and involve employees in what is being proposed.  They are the people who will have to implement and live with the changes and they may well have innovative ideas about how to make them work.
If the changes are going to involve either some redundancies, changes to working conditions or re-deployment consulting with staff representatives or a union may be crucial in ensuring that they are accepted.
Be aware also of the procedures necessary to comply with employment legislation especially as it relates to redundancies or changes to terms of employment. An up to date staff handbook with detailed redundancy and grievance procedures can be a useful source of reference for both staff and managers.
Once the plan for modernisation, restructure, or modification of working conditions has been settled managers can help employees to adapt quickly by arranging briefings.  People are more accepting of change if they understand what is being proposed, why it is necessary, and when it will be implemented.
Finally, training and support will enable employees to feel both involved, valued and competent to handle the new situation.

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Business Development & Marketing General Rescue, Restructuring & Recovery

Machiavellianism – the most toxic of the three threats to a business?

“It is better to be feared than loved, if you cannot be both.”
So said the Italian Renaissance diplomat Niccolò Machiavelli, whose activities have bequeathed us the term Machiavellianism.
Machiavellian puppet master bossIn a business context, this final personality type of the Dark Triad behaviours (with psychopathy and narcissism) is potentially the most dangerous of the three, not least because it is often widely admired and promoted as a recipe for professional and business success.
However, that success is only at the personal level. It can be lethal for the organisation to which the Machiavellian belongs, especially if they are in a leadership position, as they often are.
It is the most difficult to detect and it involves cynicism, deceit and duplicity.

How to recognise Machiavellianism

Characterized by a duplicitous interpersonal style, a cynical disregard for morality, and a focus on self-interest and personal gain the extreme Machiavellian is likely to be an aloof, sarcastic bully, slyly manipulating a given situation to their own advantage.
They will pick their time and the situation carefully to suit their aims, generally to maintain power. While they may show a superficial charm, they operate on the principle that the end justifies the means.
As ever, with the Dark Triad behaviours, however, there is a continuum, where at the moderate end of the scale such behaviour can be positive but taken to extremes its application can damage the people in an organisation and ultimately the organisation itself.
The study and understanding Machiavellianism in business has become a topic of increasing interest.
This may be related to a growing demand for more ethical behaviour in business in the years since the 2008 Financial Crash, but perhaps also in part because of the media focus on the proliferation of employment practices like Zero Hours contracts, greater income inequality and corporate greed.
In the European Journal of Psychology, November 2015, Panagiotis Gkorezis, Eugenia Petridou, and Theodora Krouklidou, shared an article under Creative Commons rules on their study: The Detrimental Effect of Machiavellian Leadership on Employees’ Emotional Exhaustion:
While their results are nuanced and too lengthy to go into here this comment stands out:
“The findings indicated that Machiavellian leaders have a detrimental impact on employees’ organizational cynicism and emotional exhaustion … both outcomes negatively affect core attitudinal and behavioural outcomes such as job satisfaction, organizational commitment, intention to quit and job performance,”
In Why Bad Guys Win at Work, an article in the Harvard Business Review, also in November 2015, Tomas Chamorro-Premuzic, a Professor of Business Psychology at University College London and a faculty member at Columbia University, argues that “Machiavellian tendencies facilitate both the seduction and intimidation tactics that frighten potential competitors and captivate bosses”.
That might sound like a positive for a business but, he says, the individual gains of the Machiavellian perpetrator always come at the expense of the group.
The implications are clear. For businesses that rely on their reputation for ethical and fair behaviour, as most do, or should, the lesson is clear.  In order to survive and prosper as an organisation employ a Machiavellian type at your peril.

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

Estate agency business model – High Street or Virtual?

depressed looking estate agentThe UK’s domestic property sales have traditionally relied on the services of an estate agency.
Any consumer-reliant business is susceptible to fluctuations in consumer confidence, consumer buying power and on the health and strength of the economy in which it is operating. This is particularly true for estate agencies.
Some are local branches of national chains, while others are locally owned or region-specific, but most have relied on a High-Street presence, knowledgeable sales agents and marketing for their business model. They make most of their money from the percentage fee, on average 1.5 to 2.5% of the property price, charged on completion of a sale. They also generate fees from services such as valuations, conveyancing, letting and management as well as commissions from introducing insurance and mortgages.
While most of these revenue streams have been under pressure from specialist providers, estate agencies have hung on to their most profitable activity, the sale of property.
This model is coming under increasing pressure now that most search for property is done online via consolidator websites, chiefly Rightmove and Zoopla. Given the change in search behaviour, estate agents are having to list property on these sites.

Will the rise of the virtual, online-only estate agency affect the traditional business model?

Since March, reports from mortgage lenders, surveyors and the Office for National Statistics (ONS) have been indicating that both property price growth and sales have been at best slowing and at worst stagnating.
The causes have been identified as rising food and fuel price inflation due to the fall in the value of £Sterling following the June 2016 EU referendum and now being passed onto consumers, stagnation in wage growth and most recently the June 2017 General Election. The recent tax hikes on property transfers have also played a major factor, in particular at the top end where the stamp duty land tax on the purchase of residential property is as high as 12%.
Despite this, many of the traditional agents to whom we have spoken argue that sales remain buoyant due to a shortage of available properties and to continuing demand from buyers.
But, alongside the change in behaviour that has seen buyers first searching on Rightmove and Zoopla before contacting an agent, there is another factor that could affect the viability of the traditional model and this is the rise of the online-only agency.
These agencies, such as Purplebricks, Yopa and Emoov, do not have the overheads that go with a High-Street presence and therefore can offer much lower fees and charges. However, fees vary substantially with some of these agencies charging vendors a fixed fee payable in advance.
They also offer varying levels of service, with additional charges for add-on extras such as accompanied viewing, providing Energy Performance Certificates, for sale boards and even for floor plans and photographs.
These services all form part of the normal service offered to vendors by the traditional agents, who argue that there is in any case no substitute for their sales teams’ local knowledge, active marketing using their databases of potential buyers and high quality marketing materials and photography. But will vendors want to pay an estate agent £15k to sell their home for £500k?
Given that High-Street estate agents are essentially marketing property on behalf of vendors via consolidator websites, their high cost and thereby their existence suggests the model is no longer viable. Most need to change their business model before they go bust.
 

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Banks, Lenders & Investors Finance Rescue, Restructuring & Recovery

The FCA dilemma over consumer credit

Since April 2014, when it took over regulation of consumer credit, the UK’s Financial Conduct Authority (FCA) has been investigating financial products that it argues pose high risks in the context of its consumer protection remit.
High street payday lender storeBy 2015 it had already imposed a cap on interest rates and fees on short term loans, known as payday lending, and this will be reviewed in the second half of 2017.
However, the ongoing investigation has also been looking at retail bank loans, arranged overdrafts, credit cards and home-collected credit, catalogue credit, some rent-to-own, pawn-broking, guarantor and logbook loans.
This has encompassed not only charges and interest rates but also competition issues in co-operation with the Competition and Markets Authority (CMA).
Whether there will be further regulation on lending businesses remains to be seen.

The potential effects on business

The FCA is concerned about the affordability of credit and about borrowers’ ability to repay in the context of high interest charges.
In March this year it proposed new rules to help credit card customers in persistent debt, defined as those who have paid more in interest and charges than they have repaid of their borrowing over an 18-month period. Proposals include options for repaying the balance more quickly, for example by reducing, waiving or cancelling any interest or charges.
Jonathan Davidson, Director of Supervision – retail and authorisations at the FCA, said in a speech in March: “the use of consumer credit in the UK has become so ubiquitous that 60% of adults now have credit cards and 40% are defined as overdraft users…… borrowing in the UK is simply more common, and more socially acceptable, than in many other large economies.” He added that “use of debt to meet unexpected emergencies is also widespread.”
In his view this was a risk that had to be managed. He argued that in some cases firms were making profits even when customers defaulted on loans and said that fair treatment of customers should be a core part of lenders’ business philosophy.
We would argue that some lenders are lending with the intention of triggering a default and incorporating terms that make a default highly beneficial to the lender.
Despite any moral or ethical issues the FCA is dealing with, its remit is consumer protection in what is essentially a free market consumer-driven economy in which businesses and their success depend on the sale of their goods and services in a highly competitive environment.
This applies particularly, but not only, for those businesses, many of them SMEs, that cater to the retail market.
Often, their sales success will depend upon the consumers’ ability to access credit to make purchases, for example for larger items such as household white goods and vehicles.
Arguably, limiting the supply of credit to consumers would make it more difficult for these businesses to survive.
So, is there a fundamental conflict at the heart of the FCA’s existence between ensuring fair charging for consumer credit and the needs of businesses operating in an economy that relies on credit being available?

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

Could co-opetition be the answer to distressed supply chain business?

competing business people arm wrestlingEarlier this month we reported on significant increases in levels of distress in the consumer supply chain business sector.
This was particularly affecting Industrial Transportation & Logistics businesses, the wholesale sector and the Food & Beverage Manufacturing sector as identified by Begbies Traynor’s Red Flag Alert research for the first three months of 2017.
Among the steps we advised such businesses to take were getting timely restructuring advice, regularly monitoring cashflow to identify opportunities for cutting fixed costs and introducing efficiencies, such as outsourcing transport or automating activities like accounting and invoicing, improving cash flow by introducing more rigorous follow-up on late payments, invoicing as soon as possible and paying close attention to credit control and collaborating with other small suppliers to deal with larger customers in getting them to pay on time.
Another option is to explore opportunities for co-opetition

What is co-opetition and how can it be used?

Co-opetition is when competing businesses are engaged in both competition and co-operation.
They are said to be in co-opetition to gain an advantage by using a careful mixture of co-operation with suppliers, customers and firms producing complementary or related products.
So, in the supply chain example above fruitful areas of co-opetition could be in the areas of cutting fixed costs by outsourcing transport or collaborating with other small suppliers to deal with larger customers in getting them to pay on time.
But there are other benefits to be found in co-opetition as long as businesses are mindful of some simple principles of what could be called moderation in all things, as outlined by V. Frank Asaro, author of A Primal Wisdom: Nature’s Unification of Co-operation and Competition, in an online article for Smart Business.
They include not being too greedy, not burning bridges by being over-competitive, never becoming complacent and keeping the balance between co-operation and competition ethical.
The idea is to use complementary strengths to fashion a situation that allows competitors to benefit from working together which in turn can lead to each party thriving and growing their own business.
An example quoted in an article in the Harvard Business Review illustrates this. LinkedIn relies on recruiters to use its platform but, as it says: “while each group would surely like a greater percentage of the recruitment pie for themselves, the pie as a whole is larger because of the involvement of both”.
Another area is marketing where apparently competing businesses have their own USP or target market that allows for joint funding of promotion and lead generation initiatives.
Examples might be logistics companies offering different solutions or supplying different routes; or food businesses with different product ranges being sold to the same customers.
Co-opetition, used effectively, can identify not only cost savings but also growth opportunities for those taking part.

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

The latest insolvency figures reveal a worrying trend for some businesses sectors

Road sign to liquidation or insolvencySMEs in the supply chain sectors that particularly rely on consumer spending should pay heed to the latest insolvency figures, for January to March 2017.
While the figures released by the Insolvency Service at the end of April show a relatively small increase by 4.5% compared with the last quarter of 2016, the trend has been upwards now for three consecutive quarters.
There were 2,693 Creditors’ Voluntary Liquidations, 68% of 3,967 total insolvencies for the first three months of 2017, affecting particularly the construction and the wholesale and retail sectors.

Consumer confidence, inflation and import costs

As higher prices, particularly for food, have started to feed through into the shops, there have been signs of a weakening in consumer confidence and a slowdown in spending.
While the “headline” story since the New Year has been the demise of 28 large retailers including Jaeger, Agent Provocateur, Brantano and Jones Bootmaker, the implications are clear for those businesses involved in the wholesale supply chain, many of them relatively small SMEs.
Both KPMG and Begbies Traynor, have been monitoring the trends for companies in what they call “significant distress”.
Analysis by KPMG of notices in the London Gazette reveals that the numbers of companies entering administration are still relatively low, however Blair Nimmo, head of Restructuring, has identified a “steady creep in numbers that we’ve witnessed over the last 12 months”.
Begbies Traynor’s Red Flag Alert research for the first three months of 2017 has identified an increase in companies in distress, up by 26% on average over the past year in key sectors of the consumer-facing supply chain, with the Industrial Transportation & Logistics businesses up by 46%, the wholesale sector up by 16%, and the Food & Beverage Manufacturing sector up by 15%.

How do SMEs survive the growing insolvency headwinds?

Given the higher costs of raw materials imports due to the devaluation of £Sterling since the EU Referendum result, businesses will not be able to absorb all these costs and will have to pass them on to customers. This in turn is likely to reduce income for UK focused SMEs and lead to greater pressure on those that have high fixed costs.
As ever, it pays businesses to ensure they are as lean and fit as they can be and that means scrutinising their costs and reducing them wherever possible.
Regular monitoring of cashflow may reveal opportunities for cutting fixed costs and introducing efficiencies, for example outsourcing transport or automating activities such as accounting and invoicing. Another critical area for SMEs is to improve cash flow such as introducing more rigorous follow-up on late payments, and invoicing as soon as possible. Close attention to credit control and collaborating with other small suppliers can also help when dealing with larger customers and getting them to pay on time.
Above all, potentially vulnerable SMEs should not wait to get restructuring help and advice. An objective eye sooner rather than later and before a business is in crisis can make all the difference to survival.

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

Staff costs, efficiency and productivity

business core valuesIn this month, when our blog theme is about monitoring and measuring performance and putting appropriate systems in place, today’s blog topic is about applying this to employees, efficiency and productivity.
Of course, all businesses want to maximise profits and minimise overheads and one of the biggest overheads can be employment costs.
However, as the recent employment tribunal ruling against Uber’s conditions of employment and now potential action by people working for Deliveroo suggest, a ruthless strategy of keeping employment costs to a minimum above all else can backfire.

Staff productivity is achieved by investing in people and job security

As the above examples illustrate classifying people as self-employed or issuing zero hours contracts may minimise the wage bill, but it may also be myopic if a business wants to protect both its longevity and its growth.
Clearly, people want job security and at least a fair return for their efforts, but many studies have shown that offering additional cash incentives for improving efficiency or productivity is not effective.
What works better is for employees to feel valued, included, respected, listened to and engaged in any changes being contemplated.
This starts from the moment a new member of staff joins a company, when employment contracts, terms and conditions should be clearly stated and fair.
They should be settled in with an induction programme that makes them feel valued and welcome, one that introduces the culture and values as well as training them to use equipment and the company’s procedures.
It may seem like a revolutionary idea but when change is being considered, consult those people “at the sharp end” who will be doing the job.  Indeed, they often have ideas that management have not considered and a much better idea of what will work and what will not.
While setting targets and goals that can be measured is essential for productivity and growth, recent research by the Centre for Business Research in Cambridge and the Global Development Institute in Manchester has shown that employees’ productivity is directly related to their personal development and security of employment.
Investment in employees as well as equipment is more likely to ensure long term prosperity for a business than keeping them living with the fear of job and financial insecurity.

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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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Business Development & Marketing General Rescue, Restructuring & Recovery Turnaround

Have you got the basics of your social media marketing right?

Ready for Tomorrow?Social media marketing is an increasingly important element of business promotion and therefore should be on the list for review when a business is preparing to implement strategies for fundamental change.
As all businesses change and develop over time, so must its core support tools, which means everything including production, marketing, management and reporting.
So it is worth revisiting the key questions that should have been addressed when a social media campaign was first launched.

Questioning the social media marketing fundamentals

No marketing is likely to work if it is trying to sell the wrong product to the wrong people, worse still if a business has not researched whether there is actually a demand for whatever it is planning to offer.
No matter whether a product or service was well received when it was launched, it may be that it has outlived its usefulness or that there are now more competitors in the market.
It is worthwhile, therefore, to revisit the question of whether it is something people want before making any adjustments to the marketing plan.  The best way to find out is to actually ask real people what they want or need. Getting to know them as people is crucial.
The answers may not only give a business clues as to how better to refine its offering but will also give a more accurate picture of its target audience and where best to find them.
Armed with this information a business can make changes if necessary to its product or service so as to provide a solution to what its customers need NOW, not that they needed when it was first launched.
Providing the right products and services is key to growing a business. Marketing them is basically all about making sure customers know about them, where to buy them and making it easy and friendly for customers to deal with your business rather than a competitor. Social media can be used by itself or be integrated into a strategy that uses many different ways of communicating with customers.
Of course, developing and implementing a social media marketing plan may include creating message templates, ensuring any written content is to the point, sparkling and engaging to that specific market, and that images support the message. Testing alternative messages and posts is also necessary determine which works best.
Get it right and a business can use social media to support its growth plans, get it wrong and the best social media marketing plan will be a waste of time.

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Banks, Lenders & Investors Finance General Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs

Early exit from CVAs can work for the business and its creditors

business recovery signpostA Company Voluntary Arrangement (CVA) is a mechanism for an insolvent business to continue trading by paying off its debts out of future profits over a period of time providing it has the consent of 75% of creditors.
Many CVAs are structured to run for a five-year period with monthly payments throughout that time.
Generally, they cannot be varied during the first 12 months, mainly due to a standard modification that is a condition for approval by HMRC’s Voluntary Arrangement Service (VAS).
However, there is scope for varying the original terms of a CVA by making a subsequent proposal to creditors for early termination after the initial 12 months. Like the original CVA this requires 75% approval of creditors but it can involve offering revised terms, such as less money now rather than that offered over 5 years.
If such a variation is likely to be approved by creditors the business and its shareholders will need to be in a position to raise a lump sum either by borrowing or by attracting further investors.

The benefits of an early exit from a CVA to the company 

The business will benefit from paying less money as a proportion of its debt with more being written off. The effect of this will have the additional benefit of a stronger balance sheet post CVA.
Early termination will also free the company from its monthly obligation and as a result improve its cash flow.
Once clear of the CVA it will be in a better position to pursue more aggressive fund-raising and growth strategies and will be able to resume paying dividends to shareholders.
The benefits of an early exit from a CVA to creditors are mainly that they will receive cash sooner, rather than waiting for a longer period and receiving their money in small increments. They also avoid the risk that the CVA might fail.
The question is why more businesses do not take advantage of the option for an early CVA exit. One possible explanation is that the Insolvency Practitioner (IP), who may have been an adviser prior to the CVA, becomes a supervisor representing creditors and therefore is no longer an adviser. Another may be that early termination stops the supervisor earning their fees.
We believe that IPs who take formal appointments such as acting as nominee and supervisor of a CVA should be independent throughout and therefore should not act as advisers to the company since they are required to represent the creditors. Furthermore, they should insist companies have independent advisers who are best placed to assist on matters such as considering options for the early termination of CVAs. In this way IPs can avoid a conflict of interest.

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Business Development & Marketing General Rescue, Restructuring & Recovery Turnaround

Preparing people for change in your business

Ready for Tomorrow?Business survival and growth mean being prepared to change aspects of your business and sometimes change the business model including historical plans or processes when they are no longer yielding the best results.
However, before implementing change directors and business owners should think carefully about how they should be introduced.
Too often the approach is “top down”, where somebody senior, or the CEO, has an idea and decides it should be implemented. Unfortunately, with this approach the changes often do not take root and often this is due to a lack of planning and a failure to involve others, in particular those who are necessary to implement the change and those who are affected by its consequences.

Involve employees for successful change

If, however, a business has a culture of continuous improvements and involves employees in the process of identifying and determining changes that need to be made, the chances of successful implementation are considerably higher.
While time spent discussing change with others may take longer, generally it will mean that not only do people understand the need for a change but they are likely to be invested in making it work. Furthermore, consulting with those “at the sharp end” sends out the message that their competence and their views are trusted and valued.
It is a theme that underlies the arguments in the book “Being Human” by Steve Hilton, former adviser to David Cameron, which examines the structure and effectiveness of government, business, politics and various sectors such as education, the NHS and business. The book advocates that power and decision-making should, as far as possible, be delegated to a local level for people to feel that they are involved and have influence.
Equally, in a culture of continuous improvement, where as many people as possible in a business are engaged, it is possible to make smaller, incremental changes rather than one gigantic change that has the potential to cause massive disruption.
The process of engagement early on will identify any resistance and address it before actually effecting the envisaged change.
Indeed, a consultative approach is more likely to result in initiatives being successful than decisions that start off as a good idea by management being sabotaged because those who have to work with them have not been asked whether the change is actually workable let alone beneficial.
 

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Banks, Lenders & Investors Business Development & Marketing Cash Flow & Forecasting Finance General Rescue, Restructuring & Recovery Turnaround

What factors may affect your plans and any changes to your business model?

fundamental change to business planThroughout September our blogs have focused on the considerations and factors that should be taken into account in preparing strategies for business change.
Some final thoughts before October, when our blogs will focus on the next step, of implementing the plan and making any changes.
 

Fundamental change or partial adjustment?

For some businesses, a review may identify the need for fundamental change but for most it will identify areas for improvement and most likely cost savings.
Those facing fundamental change are likely to be the result of internal factors such as resource or capacity issues or external ones, such as markets disappearing due to the EU referendum, or costs increasing due to the impact of exchange rates.
In this scenario the business will need to transform itself with a completely new offering.  A good example is the recent closure of all the BHS stores and the subsequent announcement of plans to set up an online BHS shop instead.
Another example is that following the Brexit decision, businesses that sourced their manufacture overseas may now have found that it is actually cheaper to manufacture at home to take advantage of the lower export costs following the changes to currency exchange rates, particularly £Sterling, making UK export prices more competitive.
In this sense, UK could be about to reverse the trend of the last 30 years, of closing down factories to outsource the manufacturing of goods which can now be made more cheaply at home. In the UK, if energy prices and the value of £Sterling remain low on-shoring manufacturing would make sense, but it will require significant investment in manufacturing capacity and the training of labour.
Essentially, therefore, reviewing your current business model is not only about understanding the current and likely future of economic conditions, but also what your business is selling and asking difficult questions about changing customer needs and behaviours. Any delay in making difficult decisions can leave a business behind those who are more proactive.
While transformation may be needed by most businesses, some parts of the business will need attention to remain competitive.
Continuous improvement, flexibility and agility make sense, given the opportunities and competition of a global marketplace, and particularly in the aftermath of the EU referendum.

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Banks, Lenders & Investors Business Development & Marketing Finance General Rescue, Restructuring & Recovery

Achieving a positive Brexit outcome will need realism and patience

keep calm and stay positiveIf ever strategic planning for the longer term was needed, it is now as a consequence of the Brexit decision in June’s referendum.
Arguably the short term approach by directors, investors and lenders has been a feature of modern business life ever since the Thatcher era of the Big Bang computerisation of the stock market and the advent of free-floating currencies, as Andrew Marr suggests in his book A History of Modern Britain.
This short term approach is reinforced by the calls to “get on with it” that have been escalating both in the UK and from various parts of the EU.

Realism and patience

When the decision was made the world was never going to collapse nor was Britain going to enter into the darkest recession.
However, what we did do was communicate to all those who do business with Britain that the country will not be in the EU in the future regardless of the outcome of negotiations.
The adjustment of foreigner investor’s perceptions of Britain has already begun.
If Junker and the French have their way, we British will be taught a lesson that will translate into significant economic pain.  However, it is also true that all those who are current investors in Britain will not withdraw their investments. Well, not overnight.
But anyone considering new investments with the objective of unfettered trade with the EU cannot now choose Britain, at least not until the trading terms have been agreed.
Those who are saying “it’s all going to be all right” are deluded and ignoring the monumental task needed to restore stability.
While the focus has been on a post-Brexit trade agreement with the EU, all our current trade agreements with the rest of the world are EU ones. Until new ones have been agreed with each and every major country, uncertainty will persist and that will translate into a lack of decisions about investment. This is likely to take a very long time.
Despite the lack of agreement for post-Brexit trading, non-EU countries and businesses that have a productive and good working relationship with Britain will not risk jeopardising that regardless of EU politicians’ desire to teach us a lesson.
Patience and strategic relationships will be key to our success as a trading nation post Brexit.
We might remind ourselves of those courageous pioneers who built the British Empire 200 years ago. It was essentially a trading network built on relationships forged by foreign travel. Now is the time to get out of our comfort zone and make friends with the rest of the world.

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