FINANCE DIRECTORS might think that the worst of their financial struggles are over as Britain’s finances begin to recover, but more companies become insolvent when the economy starts to pick-up than during a recession.
By paying close attention to cash-flow and keeping a firm hand on budgets, FDs have kept the majority of businesses solvent throughout the recession: making ends meet but not necessarily paying down debts or adding to the bottom line. The OECD’s prediction of 1.5% growth in 2014 should bring relief to stagnating companies heralding a new start, but for many it will be the start of the end. When it comes to insolvency, a recession is the calm before the storm.
Businesses that have managed to stay precariously afloat can be sunk by billowing sales. An increase in orders is great, unless you lack the financial flexibility to service those orders: paying for new supplies, additional man-power and higher operating costs.
Following the recession in 1991, corporate insolvencies (both compulsory and voluntary) peaked in 1992 with 24,425 and remained high in 1993 with 20,708, before falling to 16,728 in 1994. Following the economic down-turn in 2000 and 2001 which came after the boom of the 1990s and the dot com bubble, insolvencies rose in 2002 by 5.28%. It is a cruel twist that precisely when things start to look better for the economy, the number of business failures begins to increase.
There are a lot of companies out there on the brink of failure. The latest figures from the Insolvency Service which were published on 3 May 2013 show that insolvencies fell in the first quarter of 2013 by 15.8% compared to the same period in 2012.
While guarding against the risks of an upturn might seem absurd, the pattern in the historical insolvency statistics shows that the risk is a real one. Cash is king for businesses that want and need to grow to meet an increase in demand, but the danger is that the cash can run out before a business is able to fund growth with income.
FDs should change focus and prepare the business for all hands on deck.
Until new receipts start to flow-in, FDs should maintain the pressure on debtors to pay their debts in a timely manner. This is no time to relax terms or due diligence on potential new customers to ensure that they are stable and financially sound.
Even historically reliable customers will be coming under pressure from increasing demand and could wobble. Your sales team can act as your eyes and ears to constantly monitor customers’ financial soundness. Credit control systems will be vital and both processes and people should be reviewed.
Continue to negotiate deferred supply terms where possible to bridge the gap between financing growth and receiving payment for new orders. Only pay when you need to – without losing the support of your key suppliers. Importantly, keep on top of tax liabilities related to increased business.
Remain lean: keep stock levels to a minimum while ensuring the business has what it needs to meet demand. Take advantage of the up-turn in demand to dispose of obsolete stock.
Request an increase in your credit line from the bank sooner rather than later, based on positive growth plans and cash flow forecasts. Also consider alternative sources of funds, such as asset backed lenders or debt factors and approach them before getting to a crunch point.
As the economy improves employees start to become mobile once again. Job opportunities open up and businesses risk losing their key people. Look after your talent: it costs to replace and retrain people and the business could come under pressure while waiting to find the right person, or for people to serve notice periods.
If lack of manpower is restricting the business, consider using part-time or temporary staff. On the other hand, now is a great time to get rid of “dead wood”: review the business’s needs and ensure that you have the right level of competence and expertise in key roles to take the business forward.
There are a few key differences between the recent recession and other recessions in the UK’s history. On the negative side, banks are still very tight with money and it is not easy to get a credit extension or a business loan, but on the positive side, there is a greater willingness by employees to be flexible about working hours and salary. But perhaps the biggest difference is that the recession which started in 2008 has been so deep and lasted so long that management may have forgotten how to be bold and brave.
John Alexander is a partner and insolvency practitioner with accountancy firm, Carter Backer Winter