Recession Ahead! – Getting your business through a cash crunch

PERRY LEWIS FCA CF, SAMI TUCKER ASPEN WAITE CORPORATE FINANCE Recession Ahead! Getting your business through a cash crunch.

With global recession much on the cards, more and more businesses are likely to feel the impact of tightening credit and the effect on cashflow of the downturn.

A fall in sales may have deprived the business of the fuel it needs to drive it forward - working capital. The business is feeling the impact of paying for purchases, wages, overheads and the additional debt taken on in the lockdown, including those unpaid bills.

It is extremely easy to slip into panic mode avoiding calls from suppliers seeking payment, paying bills only if you really must and making false promises just to buy more time. Time for time out. Time to stand back and work out a plan to get you through from survival to “thrival” mode. It may be that technically you are insolvent. This is defined as being unable to pay your debts as and when they fall due. This means you must be extra careful not to be caught in the “wrongful trading” trap where, as a director, you can be made to pay for the losses incurred because of your actions or inactions. Or to pay one creditor in preference to another when they both have equal rights in an insolvency.

“Wrongful Trading” is defined in the Insolvency Act 2006 and governs the actions of the Directors where:

“They knew, or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation” and they did not take “every step with a view to minimising the potential loss to the company’s creditors”

First some principals to stick to when making a survival plan:

Keep ahead of the business

creditors: By taking the initiative to contact them, and explain you need say 14 days to take advice and come up with any proposals for payment

4. Involve your entire

management team and brief all

staff: Clearly there are sensitive issues involved which need to be respected. Conversely transparency is often better than uncertainty. The trick is to find the right balance.

Attention to detail: Go through every item of expenditure. Where can costs be cut? Can you find alternative and cheaper suppliers, negotiate payment holidays with the landlord or find smaller and cheaper premises? Can you negotiate discounts with essential suppliers, change working practices as regards staff working from home?

Government incentives:

Apart from the various loan schemes available to businesses, the Research and Development Tax Credit Scheme affords the opportunity for significant corporation tax refunds to many businesses with the definition of eligible expenditure much wider than most businesses realise

Stop the situation getting worse:

Hope and desperation is not a way to run a business. The plan should be realistic, and the cash flow reflect the results of running the core business as actioned without any insolvency getting worse

Time out: At the outset, set aside some time and space for yourself to assess the position of the company, take advice, and plan for recovery

No false promises:

Your integrity is essential to win trust with all those dealing with the business including staff, customers and suppliers

Formulate your plan:

By putting together a weekby-week cash flow projection for say the ensuing three months as well as a monthly cash flow projection

Turn assets into cash:

Such as receivables, stock, plant & equipment, property? Is a sale and leaseback of plant or vehicles or property possible? Can you sell off obsolete or slow-moving stocks at a discount? Can you buy goods on sale or return? Can you rationalise your vehicle fleet? Defer capital expenditure?

Finance: Needless to say, the prospect of raising either equity or loan finance depends on the business demonstrating its prospects of successfully trading out of its difficulties, and its ability to service such finance/provide returns

At Aspen Waite, we pride ourselves at standing by our clients and helping them with advice and support through thick and thin. So if you are worried over the impact of the impending downturn on your business, why get in touch with one of our experts today

Ideally your survival plan will show a surplus of cash available to make a proposal to creditors in respect of the payment to them of arrears on the basis that current supplies will be paid for within their usual credit terms. Whether any surplus is sufficient or not, it is essential to take advice from an insolvency practitioner before putting forward any such proposal. If there is a reasonable prospect of recovery, there are two forms of process that can be used if the risks involved in an informal arrangement with creditors are too great:

Company Voluntary Arrangement (“CVA”):

This is a process in which a company comes to a formal agreement with its creditors for the repayment of the debts which the company owes. A CVA can be desirable if a company has mounting debts and needs help in delaying, and potentially reducing, these debts.

For a Company Voluntary Arrangement to be put in place, it requires the approval of at least 75% (in value) of the creditors (i.e., the people who are owed money). A CVA can last for any length of time as they can be used for a short-term or a long-term fix; and it must be monitored by a supervisor – who must be a Licensed Insolvency Practitioner.

Administration: Here the company is put under the management of Licensed Insolvency Practitioners. The directors can appoint administrators through a court process to protect the company and their position as much as possible. The Practitioner is then charged with considering and putting into effect any recovery plan.

With a CVA, the control and management of the company’s business vests in its directors, whereas in the case of an Administration, it vests in the appointed insolvency practitioner. However, the costs of an Administration are much higher, and the procedure is more appropriate to larger companies.

Both these processes afford significant protection from the actions of individual creditors preventing a viable recovery plan being subverted.

At Aspen Waite, we pride ourselves at standing by our clients and helping them with advice and support through thick and thin. So, if you are worried over the impact of the impending downturn on your business, call your Aspen Waite contact, or call 01278 445151 and ask to speak to a senior business adviser.