The majority of businesses have periods of stress and distress during their life cycle. The keys to managing these periods to achieve a successful profitable business are recognition, decision and implementation.
In most cases, management are aware (from available internal management information) of issues arising before they do in terms of a potential reduction in revenue or increase in cost. Once these periods are recognised management can move to address them by taking decisions to manage the situation to a positive outcome.
One clear sign of stress or distress is creditor pressure: demands for payment followed by proceedings or the commencement of insolvency action. Make sure that a dialogue remains open with creditors. Usually, agreements can be made with creditors (or some of them) to extend credit terms or to pay by instalments. Formal “standstill agreements” can be entered into in more complicated and longer term cases to permit restructuring and/or refinancing implementation. Less formal written understandings are more frequently used.
Key creditors should not be “kept in the dark” but engaged at an early stage. Landlord’s are usually willing to consider alternative payment proposals and short term variations to commercial leases provided that they are on notice of the problems and are treated fairly and equally with all other key unsecured creditors.
Balance the need to “protect” the employees in the business and the need to engage with key employees to assist in the turnaround. In our experience, key employees tend to be loyal and committed to helping the business return to success when they are engaged by management and aware of the issues at an early stage.
Consider the skill set of the management and any obvious skill gaps which need to be filled now or in the future. Consider also any non-core business activities which might be a distraction to the core business and which might be better being hived-off into another business or sold to a third party.
Make sure that all company filings are up to date and all tax and VAT returns are completed and submitted in time. Failure to submit returns increases cost to the business (in terms of interest and penalties) and simply aggravates the authorities. If a “time to pay” agreement is sought from HMRC in distressed situation the overall conduct of the company in meeting its obligations to HMRC forms an important part of the assessment made by the authorities.
A robust collections policy and procedures which are easy to implement to collect debt are invaluable. Deviant payers should be identified quickly and dealt with assertively to maximise returns. Resist extending credit terms unless absolutely unavoidable and make sure that larger debt instalment agreements are, if possible, secured.
A continuing review of all overheads of a business is invaluable. Make sure these are undertaken on a defined regular basis. Most businesses in today’s world are fairly “lean” when it comes to cost but there is always scope to make further cost reductions in the short and medium term to enhance the overall profitability of the business. Balance the cost of making cuts now against the impact on turnover (ability to meet customer contractual obligations) and the long term savings or increased efficiencies that can be achieved.
Most businesses have regular review meetings with their bank or financier. A recent survey undertaken by Pitmans LLP looked at “funding your business” and took results from 123 companies based in the Thames Valley who felt, overall, that there was a steady market confidence and did not feel that the availability of finance was a bar to success. Funding is available to those businesses who have a good core business and who have capable management who have personal investments in them. Consider taking advice as to the ability of alternative funding or, if appropriate, Government backed funding schemes. Maintain an open mind as to the sources of funding for your business. Engage the funder and keep them engaged in the restructuring process – they will help.
Take advice at the earliest possible stage from an experienced restructuring professional who will have plenty of experience in restructuring successfully on a project only basis. All restructuring is a team effort in collaboration with professionals, stakeholders, creditors, key customers and management.
Courtesy of Thames Valley Business Magazine July/August 2013