Strategy & Operations » Anticipating, mitigating and rectifying insolvency fears

Anticipating, mitigating and rectifying insolvency fears

If the Carillion saga has proved something, it is that no company is too big to fail. Simon Willmett explains how to anticipate and rectify insolvency fears.

Insolvency, administration, and liquidation are some of the scariest words in the dictionary for financial directors. A flurry of media headlines earlier this year made for dark reading. Carillion, the UK’s second largest construction company fell to its knees, having amassed £1.5bn of debt, while some of the big brand collapses we have seen on the high street led some commentators to question whether we are looking at an ‘infected era’ in the retail sector. One thing is clear: no business is too big to fail.

The road to this endpoint, however, is generally a long one – with plenty of steps that you can put in place to spot the signs of potential distress to either mitigate or head it off.

Finance planning

The single most important thing you can do is to take responsibility for proactive financial planning. As financial director, you will have ultimate oversight, though collaboration with the wider leadership team is essential to inform your future planning and modelling.

It’s important to understand the business vision as well as some of the more tangible goals and decisions made by the senior team. You will need to be aware of both short and long-term plans, as well as growth ambitions, any new hires planned, or anticipated uptick in business activity. For instance, plans to double the size of your sales team or increase orders and stock could mean that you exceed your current finance provisions, as this type of investment usually takes a few months to pay off and involves up-front costs.

Even in small companies, communication between departments and teams can sometimes be stilted, so do not assume that all of the plans are coming from the top. If this is the case, introducing a regular forum for sharing through regular catch ups or a feedback loop over email, to ensure you have all the information you need, can be helpful to avoid similar situations.

Finance as a growth tool

There still seems to be a certain stigma attached around the use of external finance as though relying on any means other than self-generated cash is a sign that your business is struggling. This is usually not the case and in fact, recognising where borrowing can be a strategic advantage is a smart way to ensure that you can get ahead and achieve your goals.

Many businesses have quite dramatic peaks and troughs in cashflow for good reasons. This could be seasonal variation, quarterly VAT bills, other large costs related to a discrepancy between the payment terms you hold your clients to, and those you are held to by your own suppliers. Recognising this will allow you to minimise the impact that this has on your business operations, planning and sales.

Understanding your position is important, and will help you find the right finance partner, and loan structure, for your needs.

Spotting signs of distress

As soon as you start seeing any signs of distress it is important to get the right advice and support. I have personally seen numerous companies which have fallen into insolvency because the senior management team hasn’t tackled the challenges facing the business as quickly as they could have.

A business which isn’t profitable is at risk. If you are totally reliant on borrowed finance, your destiny is never truly in your own hands. Even if the business is profitable, be wary if this is not accompanied by positive cash flow – liquidity is important, and keep an eye on slipping margins, both gross and net.

Look out for stagnant or decreasing sales. This might be subtle, but it may be an amber flag if they are increasing at a lower rate year on year. Likewise, watch out for any sort of decreased quality in your product or service. Customer experience is important, and a good product should stand up for itself in challenging times.

High employee turnover can be another warning flag and would be a mistake to overlook the importance of the general atmosphere within a business. You can interpret a lot from the feel of the office and the culture.

Lining up for a loan

Complex products such as Invoice Finance or Asset Based Lending generally require longer lead-time to research and apply for. Payday loans are not the answer – you should know whether you’re going to need external finance at least four months in advance of when you’re looking for the cash to hit. You will need unabbreviated management accounts, including cashflow, profit and loss, balance sheet and order book statements at your fingertips. Lenders will want four key pieces of information from you. How much you need, why you need it, when, and how long you’ll need it for.

Bear in mind that the legal process will dictate the timeline of the ultimate payout. As ever, it’s sensible to allow some contingency time whenever you are relying on external decisions.

If the worst happens

If the business does fall into distress, it’s of critical importance that you minute every single decision on a formal record, in line with compliance obligations. To assess the extent of the problem, you will need an up to date cash flow statement, and any recent monthly management accounts and projections. You should consult with your legal team and accountants immediately, to ensure that directors do not become personally exposed.

Turnaround finance can sometimes be an option when you are in trouble, but only if you can show a strong track record. Of course, economic uncertainty such as we are facing currently can make it harder for businesses to access increased lending facilities and better creditor’s terms. When it comes to engaging with lenders on this basis, be ready to take advice when it is given, and prepared (and willing) to make difficult decisions quickly and concisely.

Be brave enough to really look under the skin of your business, and understand your options. Problems are generally only problems when they’re not dealt with honestly and quickly.

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