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Enterprise briefing: Life support

1 Sep 08

Insolvency practitioners – sometimes seen as the undertakers of the business world – offer Kenny Kemp some advice on how businesses can avoid falling into their hands

by Kenny Kemp

When you’re unwell you phone the doctor – don’t you? But the accepted way for many businesspeople at the sharp end has been to call the undertaker. Instead of a course of corporate antibiotics – or bitter pills and early intervention – the hearse is at the door and the business declared dead, soon to be buried.

Business people – by their nature – prefer to be in control of their own destiny. They do not want any unasked-for interference in the way they run their business. They do not like advice – even free advice, thank you! That’s fine when the economy allows good firms to plough their furrow – but survival depends on listening to those working in industry’s life-support wards.

Now UK businesses face the prospect of a recession. The NICE (non-inflationary, constantly expansionary) time is over. Now we face a RUF (really ugly future) period. So CA Magazine asked a range of business doctors to offer some remedies. Some of the best advice comes from the breed of company undertakers – the insolvency practitioners – who see what goes wrong every day. These experts can offer prescriptions worth taking before it’s too late.

1. Let the bank know what you are doing

Matt Henderson is an insolvency practitioner with Johnston Carmichael, one of Scotland’s largest accountancy firms. He says: “The number one issue has got to be communication with the people who fund your business. It always amazes me how quickly funders lose confidence in a management team if they don’t talk about the business.”

A good management team has to be aware what is going on deep inside the business. But they also need to know how to deal with things when they go awry.

“If there is bad news, you need to tell the bank,” says Henderson. “But what they want to hear is what strategy you have for dealing with this. They want to know what kind of commitment you have to the business.”

Henderson says that there is an understandable pride with some long-established second or third generation businesses that have never had to ask for outside help before: “There are ways that seeking some early advice can help build a proactive strategy that ensures a solid future for the business.”

2. Be prepared to share the pain

Pain need only be temporary – if an ailment is cured. Blair Nimmo is well known as head of restructuring at KPMG. He says if your business is finding it hard, you can’t expect your funders to take all the pain. Nimmo adds: “How prepared are you to make a few sacrifices during a downturn? That’s an important question. This might mean putting in some additional security – such as personal guarantees – or extra collateral. You need to be seen to be sharing the pain.”

Rob Caven, head of corporate recovery at Grant Thornton, agrees and says the key to survival in these testing times, whether an SME or a FTSE 100 company, comes down to recognising and acting on signals early. He says: “Unfortunately, experience tells us that many SMEs do not have sufficiently strong balance sheets to weather the current difficulties and do not seek advice early enough. Without early corrective action many of these businesses will undoubtedly fail.”

3. Tackle the pension problem head on

Many UK businesses have prospered through the upturn – but now balance sheets are under pressure from the pension fund time bomb. This is especially true of UK manufacturing businesses though the classic example is British Airways, where a vast pension deficit is hindering a company stymied by fuel price hikes and a slump in business.

“Now is the time to deal with the pension issues,” says Matt Henderson. “This is an issue for businesses that once had large workforces but have retracted, and now there isn’t enough going into the pension funds. The largest expenditure for most business on the profit and loss account is employee salaries and the cost of their finance.”

Business chiefs can consider a range of tough decisions, such as wage and salaries freeze, or contracting out the workforce to another company. But this might well be a poor strategic decision in terms of long-term productivity and inspiring the best people.

Perhaps some financial arrangements can be made, such as rescheduling interest payments, and there are new ways of handling the pension issues which can alleviate tax issues. But if you do not have the necessary skills to negotiate this or you need help with new cash flow projections for a revised business plan, it is a good idea to get your accountant, pension or tax expert to help.

4. Keep the cash flowing

Life on earth needs fresh water; business needs a flow of cash. Mike McNulty is a director and shareholder of Modus Estates, a property group. He has been a CA for 20 years working with KPMG and RMD before going to DM Hall. He has been through a downturn before.

“Maintaining liquidity is the most important point,” he says. “Of course, you need a good supportive bank and must work to keep that relationship going, but cash remains very important. If it means selling some property at a reduced rate in a poor market, that has to be an option. But, of course, you don’t want it to be a fire sale, so be extremely cautious.”

Staying liquid means chasing your own cash – which has become harder. Many businesses have extended their payment terms from 30 days to 90 days. “Let the bank know this is happening to you – they might talk to you about invoice financing – or consolidating an overdraft into a business loan. But let them know,” says McNulty.

5. Don’t lose sight of your market share

Your business needs to keep its name in front customer’s minds. Ken McManus, the ICAS assistant director of member services, says cutting back on marketing is usually a false economy.

“It’s often overlooked as businesses adopt a bunker mentality,” he says.

Firms have to keep up their public profiles through direct or indirect marketing, or with personal contacts. “You need to keep promoting your business – so that you don’t allow your competitors to get in,” McManus goes on. “They’ll be keen to eat your lunch and win new business – so you don’t want to lose any of your good clients.”

He also says cutting the training budget is a poor decision in the long term. “You need to have your people in the best possible shape for when things start to turn round again. Key people are an asset you must try to protect.”

6. Take a hard look at your tax position

Too many businesses are not making the most of their tax positions. Graeme Crawford, tax partner in Glasgow with Ernst & Young, says there are ways to alleviate the pressure on businesses.

“In terms of VAT, a lot of businesses are not recovering what is due to them as quickly as possible,” he says. “That can run into thousands of pounds that are valuable when cash is tight.”

Good housekeeping is essential at this point in the business cycle. Crawford also says it might be worth looking at cutting National Insurance contributions through “salary sacrifice”, an HMRC-approved way of reducing the tax burden. It involves agreeing with staff to reduce basic salary and have their other contributions dealt with through an NIC contract. This helps the company but does not change the amount paid to the employee. If they are applying for a building society mortgage, they can have the same salary multiples.

7. Find a new business partner — or director

There is still money out there for good ideas. Business angel Nelson Gray, Europe’s Angel Investor of the Year 2008, says that good businesses in a temporary spot of bother can find funders who want to invest. “There are still a lot of wealthy people with cash to invest in well-run, solid businesses. They can also offer expert advice and might be another strong business voice on your board.”

Contact Linc Scotland on 0141 221 3321 or your local business angel network to find out who is best to talk to about support.

8. Make sure you’re using your mobiles efficiently

Communications are critical – but don’t let it cost the earth. Business consultant Frank Cullen, who worked for BT and was managing director of cable and telecoms company NTL in Scotland, says looking at telecoms spending can save businesses a great deal.

“We’ve seen a huge surge in mobile technology for business over the past five years. While fixed-line telephony charges have been static, bills have shot up because of the widespread use of mobile devices, specially the ubiquitous Blackberry. Every company needs to make a proper assessment of how it is spending its cash on phones and IT. Sending an attachment on a Blackberry takes more time – and might cost more. Do you really need that information right now, or can it wait till you get back to the office?”

9. Sign all the cheques.

In his new book, Business Stripped Bare, Sir Richard Branson reveals some of his business secrets. One is that he insists that all his chief executives sign the cheques from time to time to see where the money is going. It’s worth doing because, he says, you see savings opportunities.

10. Keep up staff morale.

Don’t talk your business into a recession. Kenny Craig, director with Tenon Recovery, says you must keep everyone on board without frightening them.

He says: “Don’t procrastinate. Of course, you should sensitise your projections and assess your banking facilities, review variable and fixed costs, and prepare for the difficult stakeholder conversations. But don’t panic and scare people. If your staff are frightened, they don’t work as well.”

Kenny Kemp is a freelance business journalist.

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