More than half of Britain's small businesses collapse because of cash-flow problems. But insolvency can sometimes be avoided.
Villandry, an upmarket French deli and bistro for London's gastronomically discerning, nearly went under earlier this year. 'We thought we were not going to pull through,' owner Jean-Charles Carrarini admits. This was a venture that had won plaudits since it first opened a decade earlier; food guides rhapsodised over its 'sublime' charcuterie. It was located in one of London's busiest and most fashionable areas. So what went wrong?
Carrarini had decided that it was time to find bigger premises around the corner in Great Portland Street. But delays on the new venue put back its opening by almost two months and the budgeted £650,000 capital raised to do it up fell short by more than £300,000. With stocks committed and staff in place, these setbacks hit the business hard. A strong opening was not enough to avert a cash crisis.
All was not lost. Independent financial recovery and reconstruction specialists Buchler Phillips were called in by the directors to assess the situation and concluded that Villandry did have a future provided it was not saddled with so much debt. The directors put Villandry into administration on the advice of Buchler Phillips, one of whose partners, Lee Manning, was appointed administrator. Manning then tried to find new investors from the restaurant trade. Six weeks later, Villandry had been sold as a going concern for more than £1 million and the money was used to pay a dividend to creditors in a voluntary arrangement. The business has survived and Carrarini remains part owner.
Villandry's is a familiar story. A cash-flow crisis is responsible for the collapse of six out of 10 small and medium-sized businesses, according to NatWest. The Society of Insolvency Practitioners puts 29% of business failures down to loss of market, 22% to management failure, 10% to bad debts and 20% to lack of working capital.
For some businesses, insolvency is the only option and companies are wound up or partnerships bankrupted. As Ron Robinson, a partner with corporate recoverer Begbies Traynor, says: 'You just put them down. It's the kindest thing for all concerned.' But others need to be helped through a difficult period. For those businesses, Robinson's advice is: 'Don't' panic and don't let those around you lose it, either.'
So when should a business seek advice? From the outset, when it draws up its business plan, says Manning. That's when potential owners should know if it is doomed to failure. 'If you go to an accountant and pay £2,000 for advice and they say you will lose £200,000, then you are better off in the long run.' Another important time is when owners want to expand the business. 'People don't plan for the funding of growth,' says Manning.
'They think growth means profit means cash. It does, but not initially.' He dealt with a computer hardware company, which had been doing well.
The owner decided to expand into software with £100,000 set aside from profits. But it turned into his passion. 'Gradually, it drained the business of its life blood and the owner's lack of attention to the core business was fatal,' says Manning.
The warning signs are clear, says Nick Brown, a consultant with Business Links Birmingham. 'When you get the odd county court summons, that's a prime indicator. Not High Court, county court. That means either you are incompetent or your money lines are stretched. Similarly, if you can't pay wages.' Ledgers are also instructive. 'Successful companies have more on their sales ledger than their purchase ledger. If there is a mismatch, the business is heading for disaster.
It is an easy snapshot to take.'
That's the point at which an objective outsider can help. Businesses should speak with their existing financial advisers, assess the situation and try to work out the nature of the problem. It may just be a matter of putting the paperwork in order and chasing debts. If the problem is more serious, find an advisor with a good rescue package and insolvency experience. Gerald Krasner, senior insolvency partner of Leeds-based corporate recovery specialist Bartfield & Co, reckons most practitioners will give an hour's free time to anyone in this situation. 'Don't stick your head in the sand,' he warns.
He put together a partnership arrangement for a large London automotive partnership, which was fundamentally sound but found itself overwhelmed by debts. The proceeds from a sale and leaseback of the business premises paid all creditors in full, with a surplus for partners. The business survived as part of a larger entity. 'We ask ourselves whether there is a viable business if we do the necessary surgery,' says Krasner.
Rescue can take several forms. Where there are only a small number of major creditors, an informal arrangement can be reached with the help of an accountant, Business Links advisor or other specialist. Unfortunately, as Robinson points out: 'The harder things get, the less people talk with their banks and other financiers.
The financier gets more and more worried because it has no information.
The directors think that if they tell, the bank will get nervous.' It's a vicious circle. But directors are often surprised at how helpful the bank or a creditor can be. They forget these parties may have as much to lose if, other than a temporary and seemingly manageable blip, the business involved is a valued customer. As Brown says: 'There is no substitute for looking them (financiers and creditors) in the eye and explaining the situation.'
'It's shocks the banks don't like,' suggests Manning. 'The bank won't close you down immediately. It will send someone in, who may suggest closing down an unprofitable part of the business.' It will also help to steer businesses away from unlicensed practitioners who prey on the vulnerable.
Beware the letter that promises the earth and appears just after a county court judgment has been registered against you.
When the business is technically insolvent but the best returns can be achieved by keeping the company going, the options are governed by the Insolvency Act 1986 and include a company voluntary arrangement (CVA), administration, administrative receivership and the Scottish equivalent, known as receivership (Scotland).
Under a voluntary arrangement, the company puts proposals to its creditors and shareholders at two separate meetings. These will often involve delayed or reduced payments of debt, capital restructuring and a disposal of assets. If accepted by the majority of creditors present, an insolvency practitioner is appointed as supervisor. The downside to this route is that the company has no protection during the notice period for the meeting. A landlord might seize goods as security for rent, a hire purchase company could try to recover its property, or the company might be accused of showing a preference if it paid a supplier to continue to deliver essential materials. Manning warns against setting over-optimistic targets within a voluntary arrangement.
He points out that they frequently fail due to management problems. 'The managers just aren't good enough,' he says.
Administration is more formal. Following a company petition, an insolvency practitioner is appointed as administrator by court order, who has absolute control over the company and its assets. The company is protected under a so-called moratorium against all creditors, while the administrator pursues one or more of three aims. First, the survival of the company as a going concern. Second, the approval by creditors of a voluntary arrangement.
Third, that more money is raised on company assets than would have been possible if the company had been wound up. 'The administrator has more time to plan. There is less panic and less brinkmanship,' says Manning.
'Decisions can be taken in a more structured way and not as a knee-jerk reaction.' Administration costs at least £10,000 and the supervision costs of the voluntary arrangement are extra. But at least you still have a business at the end of it.
THE DANGER SIGNS FOR A STRUGGLING BUSINESS
If any of the statements below sound familiar, your business may be under threat, says The Society of Practitioners of Insolvency. Take professional advice now.
Poor collection of debtor book (greater than 45 days is a good estimate).
Extended lines of credit - is exposure to key customers worsening?
Rising work-in-progress that is not billed on time.
Diminished cash balances - the bank balance steadily reducing, or planned purchases are being made by expanding payment periods, not by cash.
Over-reached overdraft facilities.
Poor cost control with too many people responsible for purchasing, leading to lack of organised discount opportunities.
Lack of long-standing relationships with suppliers. Is the business giving up on them or are they giving up on it? Is the business widening its range of suppliers simply to make more credit available?
Rising stock levels and static sales.
Final demands and writs being received.
The business is largely reliant on one or two customers - and they are not paying as well as they were.
Borrowings have been increased just to keep the business running.
Your outstanding debtors or potential bad debts seem to have risen suddenly.
The business is unsure how much it owes and how much it is owed.
It is more than one month adrift in payments to the Inland Revenue or Customs and Excise.
The bank is calling the business to say it has exceeded its overdraft limit.