Insights

Covid-19 has hit businesses in a way that no-one could have imagined. With nearly two-thirds of entrepreneurs feeling their business might not survive the pressures of the pandemic, the government’s decision to continue to give SMEs some much needed breathing space is welcome.

The continued extension of insolvency measure changes to protect businesses by giving them more time to consider a rescue plan has made - and will continue to make - a real difference.

Spotting the warning signs of distress early is always key. Fortunately, under the right specialist guidance, many SMEs are agile enough to quickly adapt and deal with new scenarios and to capitalise on new opportunities that present themselves.

Here’s how to minimise the negative impact of distress on your business.

1. Be pragmatic and proactive

It’s very easy for an owner-manager to fall into the “hoping for the best” trap, as the alternative is too terrible to contemplate. Sadly, it is this reaction that is most likely to lead to the failure of their business. Don’t bury your head and hope the problems will go away – they tend not to.

It’s essential to take stock of where the problems are and what’s happening in the wider market, bringing your senior team together to strategically review what’s been learned so far and how to adapt. This should be done when problems are first recognised and then at regular, ideally monthly, intervals moving forwards. Remember, even if a formal insolvency process becomes necessary, it doesn’t always mean the end of the road.

2. Do a forecast and then challenge it

Forecasting is always extremely important for any business, but especially now. In order to survive and identify new opportunities, forecasting is essential. Once projections have been pulled together - for best and worst possible scenarios - they’re a really effective tool to guide strategy and decision making. Take time to regularly review and challenge your forecast to work out how you can bridge any gaps in your cash-flow.

3. Don’t dither, act quickly

Knowing what to look out for - and what steps to then take – gives a business more time to react. The longer it takes to acknowledge difficulties, the quicker they accelerate and more problematic they become. Often, by the time debts are unable to be repaid, the options are very limited. Companies should be using the government’s extended deadlines to their advantage, to allow them to benefit from the extra time to get a plan in place, rather than waiting until the last minute in the weeks and months to come.

There are many business owners who, when they really think about it, don’t want to rebuild their business. For many, they recognise that it wasn’t particularly viable prior to the pandemic. Others find themselves at a life stage where starting back from scratch isn’t what they want to do. We often ask business owners what ‘good’ looks like for them and we formulate a plan from there. Even at the later stages, distress doesn’t mean disaster. From time to time, we are all faced with a situation or posed a question that we don’t know the answer to. By working with specialists however, you’re best placed to find a solution.

4. Ask for help

We should never be afraid to ask for help as without it, we don’t - and often can’t - succeed.

Since March 2020, UK businesses have borrowed over £50billion under government-backed lending programmes and new support is being unveiled as the virus continues to disrupt businesses. One in four firms that took on debt through state lending programs say they may have to scale down operations to repay it and one in five state that profits only just cover their debt interest payments.

Times are clearly very tough for many businesses, but again, a greater proportion of them can certainly be saved if issues are taken on board and specialist advice sought earlier.

5. Don’t be afraid of insolvency, rescue is always a priority

Confusion surrounding the insolvency process - and fear of repercussions from seeking advice from a corporate recovery professional - means that many owner managers often leave it too late to get help. There is a misconception that asking an Insolvency Practitioner (IP) for guidance will automatically lead to the closure of the business.

On the contrary, a restructuring firm will always try to save a business if it is possible to do so. Early engagement means it is usually possible to develop a practical strategy to put the company back on a steady footing. For example, a Company Voluntary Arrangement (CVA) procedure is suitable for many more businesses than just high street brands and large multiple retail chains. As well as engaging creditors up-front, a CVA offers flexibility to be tailored towards very particular circumstances such as future lockdowns and the constraints of the tier systems. It’s a helpful recovery option to buy time until business picks up and can also offer some debt forgiveness.

Pre-pack administrations can also be the right option in some circumstances, but they are now subject to increased external scrutiny - particularly where business sales to connected parties are involved. Make sure you take advice from a reputable and licensed Insolvency Practitioner who can help you steer the correct path. Those who get it wrong could face ongoing challenges from the taxman.

If you would like to discuss your business and the current challenges then contact partners@rjp.co.uk

Author

Andrew Duncan, Director, Leonard Curtis Business Solutions Group