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

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

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

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

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

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

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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 Business Development & Marketing General Rescue, Restructuring & Recovery Turnaround

A revolution in business culture?

Are the super rich at the World Economic Forum in Davos “morally and intellectually bankrupt” as opined by Will Hutton in last Sunday’s Observer? He argues that many of them generate excessive profits by squeezing employees’ wages. More tenuous is his view that this lack of wealth redistribution is restricting economies that would otherwise trade out of recession if employees had more to spend. 
However Mr Hutton does have a point: “Reality will out. Everyone knows by now, even in Davos, that there can be no return to the world before 2008, relying as it did on abundant supplies of cheap credit. Equally, we need our economies to grow with real, sustainable growth, as opposed to an artificially stimulated variety….. Real growth can only be achieved by the economic empowerment of ordinary men and women, by promoting individuals to become capitalists, to want to be owners who will bear the pain, and also share the spoils.”
He suggests: “It is a wonderful opportunity for enlightened business leaders, politicians, trade unions and indeed all of us to reimagine the role of people in western societies. One of the reasons it has been easy to reduce the power of people in the Anglo-Saxon world is through fear, fear of change. This has preserved the status quo and kept incumbent leaders in power.”
Those with long memories will recall the militant opposition of the British trade union movement to co-determination – that is, putting workers on company boards – in the 1970s: stupid. 
Yet Britain, and the West for that matter, needs a way of relating labour to capital. We need to engage employees by encouraging ownership and sharing the benefits of their efforts. It seems an impossible ask. We need employee representatives, union negotiators and business leaders to become leaders of change. Not confrontational or militant style negotiation of change, take it or leave it, one out, all out but strategic leaders who can negotiate reward for productive effort – to argue for a share of the spoils when they are genuinely there, but acknowledge that it might involve sharing pain to get there. They should be able to cut deals and support firms when jobs are at risk, but also make sure the deals are fair for all stakeholders when the business is turned round. 
Hutton argues: “One way forward is co-determination, putting employee representatives on company boards. Another would be to revisit the ideas of Nobel prize winner Professor James Meade and organise compensation so that a firm’s profits are equitably shared between workers, management and shareholders.” 
Whether or not Davos is intellectually bankrupt, the ideology it champions will ultimately seek to preserve the interests of its delegates rather than promoting those of employees. Capitalism certainly requires intellectual challengers, social movements and union leaders to take risks and reimagine their role. 
The best time to negotiate a good deal for workers is when their employer really does need their support, when they are in a financial crisis and need to restructure to survive.

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

Quarter Day Rent claims its first major scalp of 2013

K2 Business Rescue asked in a pre-Christmas blog whether January would see a rise of retail insolvencies given the December 25 quarter day rent falling due.
It may be too early to expect a flood but today’s announcement that the High Street camera chain Jessups has gone into administration with PWC as appointed administrators may be first sign. 
Jessups, which in 2009 managed to avoid administration by arranging a debt for equity swap with lender HSBC, saw a significant decline in market share throughout 2012. 
The company has 192 UK stores employing around 2,000 people and the administrators have said that inevitably some stores will have to close given the current ongoing economic crisis. 
Despite the balance sheet restructuring in 2009, Jessups is an example of a company that did not change its business model. As a long established retailer  they continued to rely on high street sales while its market and customers buying behaviour changed. 
Financial restructuring rarely works unless it is part of a strategic review which normally results in a change of business model and an associated operational reorganisation. 
The question is if companies that are currently hanging on by their fingernails do not take action and call in an experienced rescue and turnaround practitioner who will be next?
 

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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.