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Banks, Lenders & Investors Cash Flow & Forecasting Debt Collection & Credit Management Finance

Is debt your master or your slave?

Debt mastery

Since the 2008 Great Financial Crash, and perhaps even before, we have had a peculiar attitude to debt.Most of the Western, developed economies have relied on debt to keep developing and growing, but that is hardly a sustainable way to carry on.If you think about it the whole notion of usury debt is unacceptable. Despite lenders being open and telling borrowers how much they are charging, whether 10% or 1,000% interest, does that make it acceptable?
And what about the fees: assessment fee, valuation fee, arrangement fee, introduction fee, securitisation fee, documentation fee, monitoring fee, review fee, default fee, termination fee, early termination fee.
Again, even if transparent, are they reasonable?Debt has been crucial to the survival of the current economic model. Central banks make $trillions from debt using zero interest rate policies and purchasing corporate debt, as the European Central Bank (ECB) has been doing in order to keep the post-crash economic show on the road.

Are we living in a Through the Looking Glass post-capitalist world?

Is all this just adding more fuel to the fire? Is keeping inflation artificially low for so long merely extending a creeping market in zombie companies, even zombie countries?
Originally, zero rate policies were seen as a temporary measure post 2008 to stave off a global recession but was the objective really saving jobs or saving the banks?
At the time the argument was that the banks were “too big to fail” and if not helped the consequences for all of us would be dire.
Eight years on and nothing much seems to have changed. Governments are still buying bank debts and how does this relate to the bonuses paid to professional executives and bankers?
There have been few prosecutions over the speculation and risks that were taken and there is not much evidence that the culture of institutional fraud does not still prevail.
While some debt is deemed acceptable, a lot of debt is not. The appetite for investment in the businesses that we need to support to sustain our economy is not there due to the distortions of the market that have arisen from flawed policies aimed at preserving bankrupt countries, banks and businesses. The stock market too is being driven by the whole issue of where to go to put money in a safe place.
So businesses remain starved of investment funds for their medium and longer term growth, productivity remains below what it should be and the public goods, such as education, remain starved of funds to produce the skilled workforce that will be needed for the future.
But the banks, the rent seekers and the professional executives protect their interests and stay safe.
Feel free to disagree.

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

“Unknown unknowns” and the Fed's failure to confront reality

Will they? Won’t they? Should they? Shouldn’t they?
Every business analyst has been pondering whether the US Fed’s Open Market Committee would raise interest rates this week. Now we know with one exception there was a collective failure of nerve and interest rates have been held at their current level.
In essence the first rates rise since 2008 would have signalled the start of a return to normality and an indication that we are coming out of recession, which in our view would have been welcome. But clearly they bottled it.
The BBC’s Robert Peston opined that there was never a risk free time to raise interest rates. Indeed there is no comparison in history from which to infer the possible consequences.  This is because there has never previously been such a long period of near-zero rates.
This view was shared by business writer Hamish McRae, writing in the London Evening Standard on Monday.
We know some of the drawbacks of low interest rates.  Savers suffer because their savings earn them little or nothing. Borrowers, particularly household borrowers with mortgages, gain because they pay less interest although all too few have used this as an opportunity to pay down debt.
The fact is that those with a large debt, be they an individual, a business or a national economy, would face increased costs in paying back the debt following a rate rise and that would impact on future plans.
Plainly the worry about the destabilising effects of a rate rise on emerging economies (particularly Russia, Brazil and China) and the potential pain from rising prices and increased repayment costs for those that are have borrowed heavily to finance their economic growth played its part in the Fed’s decision.
But perhaps most of all the question of timing that has been exercising people and the “unknown unknown” of what a rate rise would do to a less than stable, post-2008 global economy was what justified the Fed for “wimping out” by kicking the can down the road.
Another “unknown unknown” may have contributed to their failure to confront reality, that of being held responsible for the unknown consequences.
We do, however, know that cheap money has distorted the markets and may have stored up potential for a crash. Such financial bubbles can only grow while interest rates remain low and the reality is that if a bubble is growing then the next crash will be bigger the longer it is put off.

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Banks, Lenders & Investors Business Development & Marketing Finance General

Low interest rates – the lull before the storm!

It seems that some members of the Bank of England’s Monetary Policy Committee have broken the previous unanimity and are beginning to argue for a rise in interest rates sooner rather than later.
Most recently, Kristin Forbes, MPC member and MIT professor, has warned that leaving it too late could depress the current economic recovery because of the time lag between introduction and its effect feeding through into the economy.
In our view interest rate rises are unlikely to rise in the medium term because the MPC are aware of the storm when they do.
In terms of the interest rates being paid by SMEs, these are unlikely to rise much because SMEs are already paying huge premiums, often more than 10%. This has enabled the banks to restore their balance sheets, which has been the real concern for the MPC and government.
For small businesses considering growth plans, financed by borrowing, the preferred option for a while has been to look to online lending platforms.
Nevertheless, keeping an eye on consumer spending and cash flow to ensure business is
healthy enough to provide some room for manoeuvre may become more important for SMEs.
Where an interest rate rise will really impact is on consumers, many of whom still have unrealistic levels of personal debt. Most home owners are benefitting from the expiry of fixed interest rate mortgages that automatically switched onto low variable rates because they are pegged to the Bank rate. While servicing such mortgages, many still paying interest only, may currently seem easy, an increase of 0.5% will double interest payments for many. So much for historical rates above 5% a tenfold increase in payments for many.
The potential impact on consumers is being exacerbated by the current spending on capital goods such as new cars. Most new cars are bought on tick where the low cost of finance packages is helping drive the huge growth in sales.
The unprecedented period of low interest rates at 0.5% since March 2009 has lulled most consumers into believing they are the norm. Not that anyone likes unpleasant predictions but we believe it is a lull before the storm, a bigger one than any of us want to confront. At least it will develop slowly as rate setters and governments try to protect consumers from the reality of debt – debt has to be repaid even if this can be put off for the moment.

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Banks, Lenders & Investors Business Development & Marketing Finance General Turnaround

Self employment – are we sowing the seeds of a catastrophe?

Self employment accounts for almost two thirds of the new jobs created in the UK since the 2008 financial crisis according to the Office for National Statistics (ONS).
Effectively these are micro businesses and many of the 4.6 million people in this category, according to the ONS, are older people, often offering “white collar” consulting and skilled services.
This may be keeping people off the unemployment register and the Government, naturally, attributes it to entrepreneurial spirit and more people wanting to be their own boss. It is also hoping that many of these micro businesses will grow and be significant providers of future new jobs.
However, there is some evidence that most micro business owners are working longer hours than employed staff, for lower remuneration and that many will have to continue working well beyond retirement age.
This development raises two important concerns. Firstly, how are these businesses being funded while the statistics indicate that banks and other finance providers are not lending to micro and small businesses? Are they depleting personal savings or growing consumer debt? And how will they fund retirement?
Secondly, if the earnings from self employment are lower than they for those in direct employment, notwithstanding the impact on the economy due to a reduction in spending, is this change in employment patterns sowing the seeds of a yet unforeseen catastrophe?

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

Private Equity, investment and retail

 

Earlier this year we asked whether Private Equity should be involved in High Street retail after several well-known chains had indicated their intention to float on the Stock Market.

They included Fat Face (77% owned by PE firm Bridgepoint), Card Factory (owned by PE firm Charterhouse) and Poundland (76% owned by Warburg Pincus).

Several of these IPOs have now taken place, and one has been cancelled.  Fat Face has withdrawn its proposed IPO after deciding that it would be unlikely to raise money at the level it had hoped.

This was after shares in Card Factory fell 10% a week after its launch and Pets at Home losing 3% since its float in March 2014, and despite Fat Face having increased sales to February 2014 by 8.2% following the previous year’s pre-tax losses.

Plainly PE investors are adopting a more cautious approach to the old financially driven model for realising value. The old model often involved a public to private acquisition, repaying private equity owners by loading the company with debt, and then flipping it back into public ownership.

While the prospect of a quick exit has focused the attention of Private Equity owners on public markets, all too often the valuations don’t leave much for new shareholders. The recent decline in shares shortly after being floated is a reminder of the old model that made Private Equity owners so wealthy, often at the expense of public owners who sold cheap and bought back expensive.

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

Growth for SMEs in 2014?

This is the time of year when all the pundits, stargazers and assorted “experts” start predicting what the next 12 months will hold for businesses.
K2 is not planning to join them, but we do have a few questions that may affect SMEs in the months ahead.
So let’s set the scene.  We have some indications of a recovering economy that many believe will consolidate in 2014.  However, there are plenty of experts already warning against a repeat of a consumer debt-driven, housing bubble- led upturn that is inherently risky after the property market collapse in 2008.
CBI director-general John Cridland made this point in his New Year’s address: “As a country, we need to move away from an economy that was far too reliant on consumer and government debt.”
He has, rightly, called for well-balanced growth, with a renewed effort from business to focus on new markets and exports, of both products and services.
So the questions for SMEs who may be hoping to grow their businesses are: how will they finance growth? Is now the right time to be taking on additional risks? How are they going to minimize the risk of getting their timing wrong?  Is the growth likely to be sustainable? What is growth – sales, margins or both? Are there any options for growth without taking on more risk?
We will be looking at aspects of these questions in coming blogs and would welcome comments from SMEs about how they see the future for their businesses and how they are addressing these questions.

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

Culture Shock

If all the recommendations in the Banking Commission’s long-awaited report on banking standards are implemented the banking industry will undergo a profound change in its operating culture.
We would argue that it is not only in banking and finance that a change in culture is long overdue following the 2008 credit crunch.
Businesses and consumers have already had to rethink the way they manage their finances. Businesses have been paying down debt and larger companies with comfortable capital reserves are not spending or investing. Consumers, too, are trying to repair their finances while coping with rising inflation and falling incomes.
Depending on which audience they are speaking to, however, Government seems to be wedded to austerity, sustainability or growth, as the solution to the UK’s economic ills.  
Every new monthly statistic is used to herald imminent recovery.  Most recently, new figures showing a 17% rise in mortgage lending in May 2013, compared to May 2012, will doubtless be seized on as evidence of success for schemes like Funding for Lending and the newer Help to Buy in stimulating home ownership.
Yet all the “experts” warn that without massive additional home building, they risk precipitating another housing bubble because the lack of affordable small homes will overinflate house prices.
With the homeless charity Shelter estimating that a first time buyer may have to spend 14 years raising the deposit to get on the property ladder, the chances are that consumers are already facing a massive culture change from home ownership to long-term renting, but without the tenancy protections that used to provide some security and continuity in living arrangements.
Is it time that politicians stopped grasping at short term electioneering straws and underwent their own cultural revolution to get real about economic life in the 21st Century?

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Business Development & Marketing General Insolvency Rescue, Restructuring & Recovery Turnaround

The Roller-coaster That is Magazine Publishing

The magazine publishing industry has been on a roller coaster ride for many years as print advertising revenues have plummeted, driven partly by a shift to online advertising but more recently by the drop in marketing budgets during the ongoing economic crisis.
This year alone, Sky has discontinued all its magazine titles, each of which had a circulation of £4 million. BBC Worldwide has sold 34 titles to a private equity company. Future UK closed eight titles in July, citing a decline in revenues particularly in the US, and the UK-based B to B publisher Schofield closed its US operation completely, allegedly because the US division’s bank withdrew its finance.
Publishers have been suffering from a triple whammy, of diminished advertising revenue, increased newsprint and ink costs, while simultaneously trying to service residual debt taken on during the good times. 
Yet some publishers remain up beat. London-based B to B publisher Centaur Media has announced that it will double the size of the business in three years by focusing on buying up exciting new businesses, paid-for subscription services and events. Centaur restructured into three divisions in June and says that by 2014 it will double its revenue, the proportion of money it makes from online media and its operating margins. It also plans to reduce its reliance on advertising and shrink the contribution of printed media from 43 percent to 16 percent.
The question is whether it will succeed. We know of one publishing company currently going through a restructure that had been growing over the last two years.  It has a defined circulation B to B market with publications funded by advertising revenue. However, despite its current profitability it is carrying huge liabilities built up over two years of loss making while the business was growing. The sad fact is that this publishing company was undercapitalised and as a result its suppliers have funded its growth and are now exposed as unsecured creditors.
The raises the issue of growing liabilities in an industry where revenue is declining and supplier costs are rising. The potential for a publishing house to drag a lot of suppliers down with it is huge. Restructuring such companies is also difficult since cutting editorial costs has an impact on quality and relevance to readers.
Clearly the industry will need to be much more innovative if it is to survive and prosper. One obvious tactic, as illustrated by Centaur, is to shift some titles to being online only.  Others are making some online sections accessible by subscription only and charging for special reports and in-depth industry information. Other innovations could include experimenting with outsourcing writing overseas, outsourcing sub editing and page make up and printing abroad.
Readex, which regularly surveys attitudes among B to B readers recently reported that 74% wished to carry on using print versions of the titles they read so there is plainly life in the B to B publication market. Professionals will always need to keep up to date with their industry’s developments and the activities of competitors.
Nevertheless, the print side of the industry is likely to decline. Publishers will need to be more innovative and change their business model, most likely embracing alternative media that does not rely on printing and physical distribution.

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Debt Collection & Credit Management General Rescue, Restructuring & Recovery Turnaround

Construction in Crisis – Time for a Reconstruction?

The ongoing economic crisis continues to take its toll on the construction industry with the sad news that a high profile company that was more than 100 years old has gone into administration.
KPMG have been appointed as administrators of London-based Holloway White Allom, which recently completed a refurbishment of the Victoria & Albert Museum, for which it won a conservation award.
The company, founded in 1882, was known for high profile contracts including the refurbishment of the Bank of England in the 1930s, the construction of Admiralty Buildings on Horse Guards Parade, of the Old Bailey in the early 1900s and the fountains in Trafalgar Square.
Although the company was undergoing a turnaround and restructure, following a cash injection earlier in the year from private equity firm Privet Capital, it is understood that it was forced into administration by late payment for one large project.
This latest high profile casualty comes as the construction industry faces increasing pressure. ONS figures show that output on public housing was down by 5.3% and on other public projects by 7.5% during the three months to August 2011 compared with Q3 last year, and accountancy firm Deloitte reports that the number of property and construction companies that went into administration in Q3 2011 rose by 11% to 117 compared to 105 in the same period last year.
However, some sectors of the industry are faring better than others.  Bellway, for example, this week posted a 50% annual increase in pre-tax profits, smaller construction companies focusing on repair and refurbishment are also surviving well and commercial construction activity has increased for the 19th month in a row.
Those companies that took steps to restructure their business to focus on what is likely to survive in a declining market and to deal with indebtedness early in the recession have done well. 
This suggests that those companies with a bad debt or over-indebtedness due to historical loans should consider restructuring their businesses before they run out of cash. It is not too late for them, but they are likely to require a restructuring adviser to help them.

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Banks, Lenders & Investors Cash Flow & Forecasting Debt Collection & Credit Management Factoring, Invoice Discounting & Asset Finance General Rescue, Restructuring & Recovery Voluntary Arrangements - CVAs

Businesses Should Pay Down Debt and Beware Offers That Seem Too Good to be True

Many businesses are overburdened with debt and desperate for ways to deal with pressure from banks, HMRC and other creditors. All too often they are prepared to pay off old debt by taking on new debt which leaves them vulnerable to unscrupulous lenders.
Prior to 2008, interest-only loans and overdrafts were a common method of funding, and were reliant on being able to renew facilities or refinancing.
Like many interest-only loans, an overdraft is renewed, normally on an annual basis, but it is also repayable on demand. What happens when the bank doesn’t want to renew the overdraft facility?  With the economic climate continuing to be volatile and uncertain and banks under intense pressure to improve their own balance sheets, they are increasingly insisting on converting overdrafts to repayment loans and interest-only finance is disappearing.
This has created a vacuum for alternative sources of funding to enter the market where distinguishing between the credible salesman and the ‘snake oil’ salesman can be very difficult. Desperate businesses are desperate often try to borrow money and become more vulnerable to what at first sight seem to be lenders that can offer them alternative funding solutions that the banks cannot.
Generally the advice is to beware, as the recent eight-year prison sentence handed to “Lord” Eddie Davenport illustrates.  The charges related to a conspiracy to defraud, deception and money laundering, also referred to as “advanced fees fraud”. 
The court found Davenport and two others guilty in September. Meanwhile a large number of businesses had paid tens of thousands of pounds for due diligence and deposit fees for loans that never materialised and left victims even deeper in debt. The case only became reportable in October, when restrictions were lifted.
Many businesses just want to survive and are trading with no plan or in some cases no prospect for repaying debt. In such instances they should be considering options for improving their balance sheet by reducing debt. Options might include swapping debt for equity, or debt forgiveness by creditors or setting up a CVA (Company Voluntary Arrangement).

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Banks, Lenders & Investors General Rescue, Restructuring & Recovery

Leadership, Restructuring and the Eurozone

The Germans and other northern members have benefited from the Euro effectively fixing the exchange rate that has made it easy and relatively cheap for them to sell their cars etc to southern members to whom they lent money to buy their cars. This is very similar to the banks lending money to customers who spent it.
The issue then is who takes responsibility for the debt and managing the Eurozone fallout. Do lenders write off debt, or do they lend more such as via Eurobonds or Quantitive Easing (QE) with terms that impose huge penalties. This latter route is similar to the reparations that planted the seeds of the second world war, a subject that has recently been put on the table. Or do lenders defer payments that allow for a fudge whereby loans are repaid over an extended period that effectively allows inflation to devalue the loans.
The UK has opted for the fudge route and will avoid banks defaulting through QE, low interest rates and using inflation to reduce the cost of repaying debt. While most borrowers will benefit, those with assets, savings and reserves will see them devalued while the debt overhang is cleared. Although this is regarded by many as a mistake, we saw in 2007 and 2008 what happens when banks default and are right to avoid bank defaults.
Europe however has yet to find a solution whether it is by managing southern member defaults, or providing more loans to avoid default. The problem facing European leaders is that they need to be strong and stand up to their electorates if the lessons of history are to be applied.
While European leaders find their backbone, in UK our political leaders are looking decisive, a tribute to both Darling and Osborne. Inspite of the decisions taken it will still take a long time to clear the debt overhang with a floating exchange rate and inflation to reduce debt and low interest rates to smooth the way.
Most UK companies that have undergone restructuring have much stronger balance sheets and are building reserves ready to take advantage of the Eurozone fallout. However there are still many more UK companies, that like many European members, have weak balance sheets and continue to struggle while they and their lenders put off the inevitible restructuring.

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Cash Flow & Forecasting Debt Collection & Credit Management Factoring, Invoice Discounting & Asset Finance General Rescue, Restructuring & Recovery

Do Small Businesses Understand Working Capital and Liquidity?

When borrowing against current assets, such as the sales ledger using factoring or invoice discounting or against fixed assets like plant and machinery or property, there seems to be a widespread misunderstanding among businesses about business funding and, in particular, working capital.
While credit is the most common form of finance there are many other sources of finance and ways to generate cash or other liquid assets that provide working capital. Understanding these is fundamental to ensure a company is not left short of cash.
Businesses in different situations require finance tailored to their specific needs. Too often the wrong funding model results in businesses becoming insolvent, facing failure or some degree of painful restructuring. In spite of this, borrowing against the book debts unlike funding a property purchase is a form of working capital.
Tony Groom, of K2 Business Rescue, explains: “Most growing companies need additional working capital to fund growth since they need to fund the work before being paid. For a stable business where sales are not growing, current assets ought to be the same as current liabilities, often achieved by giving and taking similar credit terms. When sales are in decline, the need for working capital should be reducing with the company accruing surplus cash.”
Restructuring a business offers the opportunity of changing its operating and financial models to achieve a funding structure appropriate to supporting the strategy, whether growth, stability or decline. Dealing with liabilities, by refinancing over a longer period, converting debt to equity or writing them off via a Company Voluntary Arrangement (CVA), can significantly improve liquidity and hence working capital.
While factoring or invoice discounting, like credit, are brilliant for funding growth, businesses should be wary of building up liabilities to suppliers if they have already pledged their sales ledger leaving them with no current assets to pay creditors.

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Banks, Lenders & Investors Debt Collection & Credit Management General Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs

Break Free from Servicing Debt and Invest in Growth

Britain lacks self confidence and suffers from inadequate education, risk averse bureaucrats and unimaginative politicians trapped in the Westminster bubble outside the real world.
Former CBI chief Lord Digby Jones identifies all these as obstacles to rejuvenating UK Plc in an extract from his book Fixing Britain. It’s a picture K2 recognises.
“Too much of Britain is focused on repaying debt and not on investment in growth,” he says. “Too many companies are servicing debt and existing for the benefit of the banks when they should be cramming down debt and pursuing a clear strategy.”
Lenders, more interested in loans being repaid than on growing their customers, are stifling businesses with potential by soaking up surplus cash to service and repay their loans.
In our view companies should return to being run for their shareholders and employees rather than for the benefit of lenders. Rescue advisers can help companies with debt restructure by renegotiating loans and interest, converting debt to equity or using a CVA to cram down debt.
We need to create a market-driven and investment culture, where profits are reinvested and appropriate tax incentives to encourage business investment.
The UK cannot compete as a low-cost manufacturer with countries like India or China and therefore businesses need to focus on high value goods and services requiring specialist knowledge to justify a premium. This is why high calibre education of young people and apprenticeships are needed.

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General Insolvency Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs

First decline in household income for 30 years causes pain on the High Street

The Office for National Statistics (ONS) reported recently that in 2010 real household disposable income fell by 0.8%, its first drop since 1977.
A plethora of profit warnings from major high street retailers is therefore no surprise. JJB successfully agreed a new Company Voluntary Arrangement (CVA) for repaying debt, just two years after its last one. Oddbins’ attempts to agree a CVA were rejected which led to it going into administration.
Meanwhile travel company Thomas Cook announced a 6% fall in holiday bookings from the UK. Dixons announced that it was cutting capital expenditure by 25%. H Samuel and Ernest Jones, Argos and Comet all report falling sales. Mothercare is to close a third of its 373 UK stores and HMV has just sold Waterstones for £53 million to pay down some of its £170 million of debt.
Falling consumer confidence, the Government’s austerity measures and rising commodity prices have led to a steady erosion of disposable income. An April report indicated an increase in retail sales, up 0.2% on February’s, but this was attributed to non-store (internet) and small store sales and probably conceals a continued decline in High Street sales.
After a few years of expansion fuelled by debt, it is entirely logical that the marketplace is now facing a sharp contraction as consumers spend less money while they are concerned about their job security and repaying their huge levels of personal debt.
Many companies need to contract and reduce their cost base if they are to survive. For the High Street retailers this means concentrating on profitable stores and reviewing strategy.
Growth is likely to involve developing experience based retail outlets in dedicated shopping environments or direct sales such as online. The High Street has failed to reinvent itself and the recession has accelerated its decline.

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

The Focus Must be on Cash Management When Times Are Tough

Profit and turnover are, of course, important measures of business performance but when times are as difficult as they are at the start of 2011 and many businesses are finding themselves in difficulties the main focus must shift to cash.
Cash flow is the most immediate indicator of the way a business is performing and can also provide a warning signal that action needs to be taken to prevent a slide into insolvency.
Close attention to cash flow should give a clearer picture of the immediate state of the business but while it may be possible to adjust to strengthen incomings against outgoings this is only going to be a holding operation.
The business must also look at its business plan and business model, preferably with the help of a turnaround adviser.  An objective outsider working as part of the business team to secure its medium and longer term future may identify fundamental weaknesses that undermine the ability to control cash flow.
The first step in managing cash is to construct a 13-week cash flow forecast to help identify risks and actions that can be taken to reduce them. It should include income from sales and other receipts and outgoings, both to ongoing obligations such as rent wages and finance and to creditors.
The business also needs to control cash on a daily basis, with payments made on a priority basis with purchases approved by an authorised person who is aware of their impact on cash flow. This will avoid the risk of returned cheques. It is also advisable to talk to the bank and keep it aware of what is being done to keep things under control.
Tight control of cash coupled with a thorough look at the business model and a realistic business plan will go a long way to help a business survive in difficult trading conditions.

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Cash Flow & Forecasting General HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery Turnaround

The Questions HM Revenue and Customs Asks to Assess a request for Time to Pay Arrears

Recently uploaded guidelines for HM Revenue and Customs case officers dealing with requests from businesses in difficulty for time to pay arrears of VAT, PAYE or tax, reveal the detail of what questions will be asked before the request for a Time to Pay arrangement (TTP) can be considered.
Applicants must be able to show that they have tried to raise the money they owe by other means beforehand.  Individuals, which includes sole traders and the self employed, may be asked to show that they have approached their bank or asked friends or family for a loan or that they cannot pay the debt via a credit card.
However, the advice to case officers also states that for individuals “it is unacceptable for us to insist that a customer has made every effort to secure a loan before agreeing TTP” because it would contravene Office of Fair Trading Debt Collection Guidelines.
Both individuals and larger businesses may also be asked whether they have any assets that can be easily converted into cash or any savings that they could use to settle the debt, even if early withdrawal might incur a payment penalty. This also applies to endowment or life insurance policies, although the HMRC cannot insist that these are cashed to pay a debt.
The HMRC distinguishes between debts below £100,000 and debts above that amount and for larger businesses HMRC would want to see evidence, usually a letter from the bank, that the company has approached their bank and discussed borrowing facilities beforehand as well as exploring options for raising money from: shareholders, Directors, book debt factoring and invoice discounting, stock finance, sale and leaseback of assets or venture capital providers.
The case officer will also consider the applicant’s previous history of paying on time, whether they have had a previous TTP and previous difficulties will weigh heavily in the final decision and whether the business is viable.
It would make sense, therefore, to have a thorough business review and the support of a rescue adviser or insolvency practitioner to assess the business viability and explore all these options and to document them before approaching HMRC.

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Cash Flow & Forecasting Factoring, Invoice Discounting & Asset Finance General Insolvency Rescue, Restructuring & Recovery Turnaround

Cash is King When a Business is Facing Financial Pressure

A company can be said to be insolvent on any one of four tests: the cash flow test, balance sheet test (negative asset value), an unsatisfied judgement (usually a county court judgement) or an outstanding statutory demand.
Of these four, the most crucial is the cash flow test which looks at whether a company can pay its liabilities as and when they fall due where late payment of creditors indicates that a company is suffering cash flow problems.
Running out of cash is the cause of most business failures and it happens chiefly  for three reasons: the bank freezing the company account, a restriction in the company’s ability to draw down funds possibly due to the lack of available credit and thirdly, a sales ledger issue where the company can’t draw down funds from factoring either because invoices have not been logged, or because of declining sales, or overdue or disputed invoices.
If the company’s relationship with its bank is under pressure then the causes and effects must be examined. Banks generally would prefer not to close down businesses and only usually start to get tough if  a business consistently tests its overdraft limit, company cheques cannot be honoured and the business does not communicate or  provide sensible financial information if asked for.
It may be that the company is forced into an onerous factoring arrangement that will benefit the bank but can reduce funds available putting further pressure on cash flow.
If the sales ledger system is not being kept up to date accurately or there are issues with suppliers over invoices then the system needs to be looked at thoroughly and a more robust set-up may need to be put in place.
In terms of cash outflow, there are two main tensions that can result and they are the inability to pay outstanding bills and the inability to pay future bills. In this situation prioritising payments becomes essential.  This is critical if a company has decided it is insolvent because it must act in the best interests of its creditors and needs clear principles for making payments to avoid personal liability.
In these circumstances unless a company is familiar with this sort of situation it would be advisable to take advice from a specialist restructuring adviser, who will have a number of strategies available to help and it may be that at its core there is a viable business waiting to be unlocked.
A cash flow crisis is an alarm bell sounding that should indicate that the business needs to be properly assessed with experienced outside help.