Financial Health Check - Not a time to be complacent

Although it has been suggested that there are signs of overall economic recovery, research from trade body R3 suggests that this is felt more by larger, as opposed to smaller businesses, with just over half of small businesses disagreeing with the Chancellor that the UK economy has moved from a rescue to a recovery situation.

When viewed from the retail sector the number of businesses disagreeing that the economy is recovering rises to almost two thirds, showing the pressure still being felt in this area.

Rent quarter day

Further research shows that some 31% of retailers face a higher than normal risk of becoming insolvent in the next twelve months, compared with 25% of UK businesses as a whole. 

The rent quarter day is often a trigger for action in a company that is struggling; with current legislation leaning towards the rescue of a business being easier after the rent quarter falls, with the rent becoming a debt in the administration as opposed to a payable expense, giving more time to restructure and affect a rescue.

You and your business

How is your own, or your business’s financial health?  If it’s not in good condition, how bad is it and what can be done to make it better? 

Common sense is usually the best indicator of when something is wrong; you may be experiencing cash flow issues.  You may be delaying payments to suppliers; finding more, and increasingly elaborate, excuses as time goes on. 

Often this leads to spending less time dealing with customers and your orders drying up as a consequence.  You may be up to your overdraft limit, looking for alternative funding.  

The tax man may be chasing for late payments.  Or you have been trying to come to an arrangement to pay?  These are just a few signs of a struggling business. 

Many businesses will hope that the situation will improve, but burying your head in the sand will guarantee that it won’t.

What can be done?

Almost all financial problems can be overcome if they are spotted early and tackled quickly, with the business turned around and put back on an even keel.  It may be that a more formal procedure is required, but the business could still be saved and live to fight another day.

The secret is not to allow the problem to fester.  Unless it is dealt with properly and swiftly it will only get bigger and much worse.

Building on solid foundations

I have seen some recent statistics that suggest, earlier this year, that there has seen a slight improvement in the number of insolvencies within the construction industry. Only slight though.

Obviously this is good news, but from what I have seen and heard I don’t think we will see a major improvement for a while yet. 

Over the last few years I have dealt with a number of companies in the construction sector that have fallen on hard times.  One of the common threads cited as causing the problem is being priced out of the marketplace due to competitors winning work with impossibly low tenders.

Companies have been winning work by quoting low, with little or no margin, hoping that they will eventually turn a profit as a result of variations etc. as the project goes forward.  This has, as mentioned above, caused problems for those that have priced a job properly as inevitably the cheaper deal will get the job.  However, this option is a high risk strategy and as time has moved on these projects are being completed and the anticipated variations and extras are not materialising, leaving the low quoting contractor facing heavy losses and possibly insolvency.

This has been going on throughout the construction industry; affecting the large and the small players alike and I expect there will be financial disruption for some time to come as a result.

Payday Mayday

We have all seen and heard the advertisements offering short terms loans to cover the shortfall that more and more people are seeing at the end of the month.  There are now many of these high interest lenders in the UK.

Recent data published by the Association of Business Recovery Professional (R3) shows that, of those concerned about their level of debt, the rising cost of living when compared to relatively flat wage growth is becoming the main cause of personal debt problems, more so than loss of employment, one off non-essential payments or change in relationship status.

So where does that leave you if in one month you have taken out a payday loan?  What happens next month?  If in the first month the shortfall was caused by a one off event, then hopefully the loan will have been repaid and it’s back to life as normal.  Obviously that’s how it’s supposed to work.  But, if a payday loan has been taken out because the cost of living has overtaken your income then the likelihood of paying off the loan and making it to the end of the next month seems very slim indeed.  From the above data it is shown that of those that have a payday loan 62% have prioritised paying it back over buying clothes and 46% ahead of buying food.

It is clear that for a number of people the cost of living has caught up to the extent that an end of month payday loan is a persistent factor in their lives and a difficult cycle to get away from.

These loans may be OK for some, one off, cases but should certainly not feature as anyone’s long term solution.

It is important that anybody with debt problems seeks professional advice.

Misleading statistics

The latest insolvency statistics appear to paint an improving picture. But is this really the case?

In the last quarter of 2012 there were 3,834 companies that entered into liquidation. That's 11% less than the same period at the end of 2011. There was a corresponding decrease of 14% in respect of administrations, receiverships and company voluntary arrangements.

For individuals there was a decrease of just under 13% compared with quarter four of 2011; down from just over 29,000 to 25,302 at the back end of 2012.

For the record in 2012 there were just short of 21,000 corporate and just over 109,000 individual insolvencies.

On a grander scale, during the last 25 years we have seen on average 1.2% of active registered companies entering into liquidation. In the last quarter of 2012 this was down to 0.7% and the peak was 2.6% in 1993.

On a personal level; in the last quarter of 2012 1 in 405 people became insolvent. Although this figure has dropped recently, from 1in 390 in the previous quarter, it is significantly higher than in 2004 and is not good reading when compared to a year on year level of 1 in 1600.

Overall the figures do show a slight downturn in recent insolvency levels, although the figures are still high when we look at the longer term picture. Perhaps the figures are misleading. In my last article I talked about Zombie Companies; those businesses that exist, but only on a hand to mouth basis and which would previously, more often than not, have folded under the pressure.

If a poorly performing business lacks a sensible, solid plan going forward it is going to find it increasingly difficult to make ends meet and will eventually go bust. I expect the above statistics will worsen to an extent in the shorter term in the lead up to long term sustained improvement. Time will tell.

Zombies

Back in mid-2007 when the recession was first mentioned, many thought that there was going to be a significant rise in insolvencies.  We are now approaching the end of 2012 and there are some signs appearing that indicate the end of the recession is close, so statistics don’t seem to reflect those initial 2007 thoughts, or should they?

The professional body of insolvency, R3, has recently stated that there may be as many as 146,000 businesses in a Zombie state.  These companies are teetering on the brink of insolvency.  They seem to be able to survive, not quite failing and certainly not thriving.  They are just about able to pay the interest on their debts but find it a struggle to pay off any of the capital.  About 8% of UK businesses are running on an empty tank and have little left in reserve.

HM Revenue & Customs introduced time to pay agreements. Interest rates were lowered and remain low.  Banks have been reluctant to force the issue and call in their debts.  This is the cause of the Zombie phenomenon.  But the danger is a sudden change of circumstance – a rise in interest rates, an increase in supplier costs or the loss of a major customer.  Any of these changes, or similar, will tip the Zombie company over the edge, probably into insolvency.

So what are the main features that define a Zombie company?  Here are some;  1 – the need to negotiate and renegotiate payment terms with suppliers; 2 – a daily struggle to pay debts as and when they fall due; 3 – paying the interest on debts but not the capital, and 4 – the distinct possibility that they would be unable to service debts at all should interest rates rise.

A Zombie company has more reason than most to be worried about the economic future. Sometimes there’s no point in trying to avoid the inevitable.

Financial Health - Back to Basics

Whilst I was listening to the radio this morning one of the pundits was waxing lyrical about the Olympic feel-good factor and its boost to the economy, with more jobs being created, people enjoying themselves and spending more.  There may be something to this, but as I have mentioned before, the economic benefits are only likely to be experienced by people and businesses in connection with the games.

So, overall, is everything really that OK?  Or, are many still feeling the squeeze?  Businesses and individuals have been under increased financial pressure for some time now.  The poor state of the economy has had an impact on us all in one way or another.  How is your, or your business’s financial health?  It may well be fine, but if it’s not, how bad is it and what can be done to sort it out?  Is it time to get a financial health check?

What to look out for

Common sense will tell you when something is wrong, for example are you experiencing cash flow issues?  Are payments to suppliers being delayed?  Are you finding more, and increasingly elaborate, excuses to delay payments to suppliers?  Are you spending less time dealing with customers and your orders drying up as a consequence?  Are up to your overdraft limit, looking for alternative funding?  Is the tax man chasing for late payments?  Or have you been on a time to pay arrangement?  These are just a few signs of a struggling business.

At this stage many people will hope that the situation will improve of its own accord.  But, burying your head in the sand will guarantee that it won’t.

What can be done?

Almost all financial problems can be overcome if they are spotted soon and tackled quickly, with the business turned around and put back on an even keel.  It may be that a more formal procedure is required, but the business could still be saved and live to fight another day.

The secret is not to allow the problem to fester.  Unless it is dealt with properly and swiftly it will only get bigger and much worse.

If you or your business needs a financial health check HJS Recovery are specialists in this sector.  

A Greek tragedy

Last time I wrote I mentioned that with the Olympics coming to town it is likely that during this summer UK holiday destinations are going to be affected, with some (those connected with the Olympic events) gaining and others losing out.   To overcome the potential slump it seems likely that those in the holiday industry that are likely to be affected will have to offer reduced rates to holiday makers.  The question was; will 2012 be the year that we see an increase in those enjoying a bargain holiday at home? 

Then (and not connected with their historical Olympic links) along came the Greeks.  As we all know, the Greek economy is in meltdown.  It is in a deadlock with regard to forming a new government and is reluctant to accept the austerity measures that have been agreed previously.  This is having a huge impact on the Eurozone, which has seen the value of one Euro drop to £0.80p.  This has a knock on effect on the UK’s economic recovery.  The Bank of England has now cut the UK’s growth forecast for the year from 1.2% to 0.8%.  It is clear that if Greece were to leave the Euro, then matters in the Eurozone would worsen even further, with an increased impact on Britain’s economic recovery.

Coming back to the above comment on the UK holiday industry, it is clear that with the weakening Euro a holiday in Europe will become more affordable.  Will a holiday at home be a bargain after all?