As the UK moves slowly and tentatively out of recession, albeit under the cloud of a threatened double-dip, there is no shortage of businesses that are experiencing cashflow problems. For some, a cash crisis is down to poor financial controls or an unsustainable business model, but this can hit an otherwise healthy business through no fault of its management.

There are a host of causes that can strike at the heart of a company’s cashflow; a key customer going into administration, the loss of a primary supplier, the departure of a key member of staff or a company disaster such as a fire. All of these events are beyond the control of management, but will undoubtedly impact, often critically, on cashflow.

What to do after a business-critical event

If your business falls victim to one of these events, there are a number of steps that should be taken immediately.

1. Consult your accountant: The worst thing any owner-manager can do at the first sign of trouble is to look the other way. The problem will not go away, it will only get worse and, the longer it is left, the fewer options will be open to the business when management finally does face the music.
2. Get a tight control on cash management: If this is an area that has traditionally received little attention, make sure it becomes a key priority. Analyse the debtors, particularly late payers, and agree a plan of action with the finance team or credit controller to recoup outstanding debts as quickly as possible.
3. Communicate regularly and clearly: Make sure internal lines of communication are clearly understood and regular reporting is maintained. If management fails to communicate with staff, then a version of the truth, usually inaccurate, will become the reality. This type of alarmist gossip will distract and demotivate staff and at worst, will result in concerned team members hunting for a job elsewhere.

If the company is unable to steady itself financially by speeding up collection of other outstanding debts, there are a number of options management can consider:

Additional funding

Finance for businesses, SMEs in particular, is never far from the news agenda. The banks assert that, despite a freeing up of capital, they are not seeing the same demand for finance. Figures from the British Bankers Association show that loans to businesses totalled £598m in June this year, £269m less than June 2009. The Enterprise Finance Guarantee scheme, designed to help businesses fund growth, also runs until March 2011 and the government has committed up to £700m in support for viable small businesses.

The key to approaching the bank, which is very likely to be an existing funder, is to seek advice from your accountant to make sure the approach is professional and accompanied with strong, transparent financial and cash forecasts.

If the debt incurred by the company is such that an approach to the bank is unrealistic given an existing arrangement, there are other methods of funding available. Asset based lending can help a business to correct a cashflow problem by freeing up capital held in company assets, such as plant, building, machinery or stock. Alternatively, if a service-based business, invoice finance provides finance against the company’s debtor book. In considering any alternative funding method, it is wise to seek the advice of a specialist adviser, who will be able to source the most appropriate finance provider to suit the business’ needs.

Merger or trade sale

Another route to securing additional finance is to merge or sell the company with/to a competitor or synergistic business. This is a very realistic option for an otherwise healthy business with a visible sales pipeline. However, clearly it fundamentally alters the make-up of the company and so must be considered carefully, taking into account the interests of all stakeholders. Again, before embarking on this route it is essential that management consults with an adviser, who will be able to help determine if it is the right path for the company and, if so, provide the necessary corporate finance guidance to ensure the best deal is secured.

Company restructure or turnaround

An option that will not alter the business as an entity so drastically as a sale or merger, is a company restructure or the use of a turnaround specialist. A turnaround or interim manager will sit alongside company management for a fixed period of time to guide the business through the restructuring process. This process will be designed to lessen the burden of the debt on the existing business, to make sure the company is able to continue to trade and, crucially, is able to grow in the future. A company restructure will inevitably involve cost-cutting and this, unfortunately, can mean redundancies. These are very tough decisions for any management team, but to put the company in a position where it can continue to trade profitably, or even to a breakeven point for a short period of time, the costs must be aligned with revenue.

What if there’s a delayed reaction?

If a management team reacts quickly to a business-critical event that severely damages cashflow, it is highly likely one of these options will allow the company to trade through the problem and go on to recover and grow. If however, as unfortunately is too often the case, the problem is ignored, it very quickly spirals out of management’s control. A serious debt issue can rapidly result in a company trading while technically insolvent, if ignored. It is then only a short step before a disgruntled creditor, often HM Revenue & Customs, initiates insolvency proceedings as result of unpaid debt.

Even at this stage, if professional advice is sought early enough it is possible to avoid going into administration. Often, through open and transparent discussions with creditors, recovery advisers are able to negotiate extended payment terms before any enforcement action takes place.

If the company is forced into administration, it does not necessarily mean the end of the road. With an otherwise strong business, recovery professionals are able to market the company and often secure a trade sale. Some advisers are adept at trading a business through a difficult administration period and then achieving either a trade sale or a management buy-out of the business. Both of these outcomes can provide the best return to the former creditors, as well as affording the business a long term future for its owners and employees.

What if there’s no reaction?

For an otherwise healthy business to fail because of a bad debt, the management team would have had to have buried their heads in the sand and refused to acknowledge or deal with the cashflow problem. This is highly unlikely, as a healthy business will, by its very definition, have a strong management team. Our experience is that if advice is sought early enough, it is very possible to save a company where the only symptom is a bad debt.

Nick O’Reilly, Partner at FRP Advisory LLP

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