17-12-2010

Cash Flow is King

Unemployment figures also fell last week for the first time in 18 months. Despite this encouraging news the reality for most businesses is that things will remain difficult for some time yet. Further factory closures such as Robert Bosch Limited in Wales, provide yet another stark reminder that the UK manufacturing sector, in particular, continues to be under threat from cheaper overseas production.

The recent tough economic climate has given many business managers the opportunity to review overheads and cut out unnecessary costs. This is often the easiest way to make a business more profitable.  One simple yet practical example is to ensure that correspondence is sent electronically rather than by post whenever possible. 

For businesses that do find they are facing insolvency, whereby, a business is unable to pay their debts as and when they fall due, seeking professional advice at the earliest opportunity can help to safeguard the long term future and stability of the business. 

When it comes to financial management the phrase “cash flow is king” is often used and for good reason.  Many good businesses fail as a result of poor cash flow management.  The key is to monitor both your creditors and debtors carefully; if cash flow becomes problematic speak to creditors early and try to initiate informal arrangements to defer payments temporarily.  For example, HM Revenue & Customs have been more prepared to agree deferred payment plans with businesses struggling to pay their tax bills than previously. If your business operates from rented premises then you should consider contacting your landlord with a view to negotiating a reduction in the rent. From a landlord’s point of view, agreeing to accept a reduced rent is preferable to having empty premises or having to issue proceedings against a tenant to recover arrears. 

With debtors, be similarly proactive, in the event of a default of payment immediate attempt to negotiate a repayment arrangement should be made.  If payments are not been made legal advice should be sought with a view to instigating proceedings.  The threat of legal proceedings will often be sufficient for a debtor to make payment.  Care should also be taken in not extending significant credit to clients and customers.  Whilst fulfilling orders keeps a business busy, you should be careful not to leave yourself overexposed with even the most longstanding of customers.

For businesses that do get into financial difficulties the options that are available include the following, IVAs’ (Individual Voluntary Arrangements) & CVAs’ (Company Voluntary Arrangements). The basic principle of IVAs’ & CVAs’ is that the business in difficulty puts a proposal to its creditors to pay them a fixed amount in the pound of the debts owing.  If the arrangement is accepted by the creditors then this allows the business to continue with reduced debt levels.  Where debt is held individually rather than in a limited company name it can be more troublesome as the personal assets of the business owner, including their home can be under threat.

Another option is Pre-Pack Administration – A Pre-Pack Administration is where the managers of an insolvent business agree terms with an Administrator to purchase the assets of the business with the Company being placed into Administration immediately after that.  This form of corporate recovery can be controversial as a ‘Phoenix’ business often begins to trade under a similar name by the same people, from the same premises having written off the debts of the previous business.  In those circumstances maintaining trading relationships is often difficult however the other side of this argument is that in many cases, were the action not to have been taken, the business would have failed with the consequent loss of jobs and with creditors left in no better position. 

Debt recovery comes in many guises from full scale insolvencies including company voluntary arrangements, partnership and individual voluntary arrangements down to simple debt negotiation and dispute resolution. Don’t leave it too late to put your Debt Recovery plan in place because if a business is found to have traded whilst insolvent, then the Directors of that business can be made personally liable for any further debts incurred during that time. Can you take that risk?