Coping with growth
17th October 2014
Despite a number of recent high profile insolvencies, such as the retailer Phones 4 U going into Administration, the number of insolvent businesses in England and Wales is actually on the decrease.
Liquidations are at their lowest levels since 2008, with the number of companies going into Liquidation some 18% down on this time last year.
The reduction in the number of companies going into Administration is even more dramatic – down almost 35%.
This is certainly positive news for businesses and reflects what many companies are seeing on the ground – an increased order book and a more positive outlook for the future.
However, whilst growth is certainly to be celebrated it also represents a period of increased risk for many SMEs.
The reason for this often boils down to two simple factors – a lack of working capital and the pressure on cash flow caused by an expanding business.
An increase in orders inevitably sees an increase in the cost base of the business – whether it be the need to fund increased staffing levels or having to buying more materials to complete an increased volume of orders.
Until those orders are completed, the customer billed and the invoice paid, the increased cost base must be borne by the business.
This can quickly burn up cash in the business and result in difficulties in meeting all financial commitments, particularly at key “pinch” points, such as a rent quarter date or when a tax bill becomes due and the business’s immediate cash requirement increases significantly as a result.
The problem is often compounded because right at the time when a business needs cash from its customers the most, those customers are often suffering from the same cash flow pressures.
This can result in customers paying late or trying to negotiate a pay-by-instalments plan. This can mean that even the best and most promising of businesses can find themselves under financial pressure despite having weathered the financial storm of the past few years and seeing a significant increase in potentially profitable work.
This may just be a short term issue until customers pay their invoices and funds are paid into the business.
However, it can (and indeed has) resulted in many good businesses falling into Administration or Liquidation if not tackled quickly.
In addition to the traditional bank funding, there are now a number of products available in the market that might be able to assist during a cash problem, whether that be invoice discounting (selling outstanding customer invoices to a funder as soon as the invoices are raised), “spot” discounting (selling a specific invoice) or one of the varied stock finance products.
Looking at potential sources of funding early certainly helps, as does considering whether the business could be doing anything better to put itself in the best possible position to deal with growth.
That review could identify a need to change the structure of the business altogether but often doing the simple things better can make a huge difference such as better monitoring of the position, negotiating improved credit terms with the business’s suppliers, more rigorous customer due diligence before giving a customer credit and/or tougher credit control procedures when a customer does not pay.
If growth does start to put pressure on finances, spotting the problem early and planning ahead is vital.
Getting the right advice at the right time is also crucial. It is often the case that businesses fall over because they leave it too late to seek advice. Sometimes the perceived stigma of speaking to an insolvency professional and/or a fear that doing so will start a chain reaction that will lead to the failure of the business means that companies often don’t take advice as early as they should.
Taking early advice when a potential problem first starts to arise means that many of these issues can be anticipated and often avoided altogether.
For those with cash to invest in other businesses, exciting times lie ahead. The problems caused by quick growth are likely to mean that over the coming months there will be opportunities to invest in and/or acquire good businesses that are in difficulty only because they are underfunded.
Acquiring distressed business is certainly not without its own risks but may mean that many good underlying businesses (and the jobs associated with them) can be rescued.
Partner, Insolvency and Corporate Recovery
* For more information on the issues raised by this article please contact Jane Garvin.
Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.
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