Business recovery is usually a process that begins with identifying financial pressure, understanding its causes and deciding whether the underlying business remains viable.
Accountants and business recovery experts approach this process from different perspectives.
As an accountant, we generally focus on financial reporting, tax, cashflow and business performance.
Recovery specialists and insolvency practitioners, on the other hand, focus on restructuring options, creditor pressure, director responsibilities and, where necessary, formal insolvency procedures.
The relationship between us can be valuable because a restructuring decision requires both an accurate understanding of the figures and a realistic assessment of what can be changed.
Identifying the cause of financial pressure
A shortage of cash does not necessarily mean that your business is fundamentally unprofitable.
The pressure may be caused by slow customer payments, excessive stock, rapid growth, an unsuitable borrowing structure or a large tax liability.
Alternatively, the business may have deeper problems, such as consistently weak margins, declining demand or an operating model that no longer works.
We accountants can help distinguish between a temporary cashflow problem and an underlying trading problem by examining:
- Profitability by service, product or location
- Gross margins and overheads
- Working capital requirements
- Debtor and creditor patterns
- Tax liabilities
- Existing borrowing and repayment commitments
- Historic and forecast cashflow
This information gives the recovery specialist a more reliable basis for assessing which parts of the business are viable and which liabilities need to be addressed.
Turning financial information into a recovery plan
Historic accounts alone are not enough to support a restructuring decision.
Management information and short-term cashflow forecasts are needed to show what the business requires to continue trading.
Forecasts may need to model several scenarios, including reduced costs, changes to payment terms, new funding or the sale of assets.
As the accountants, we can prepare and test these figures.
Meanwhile, the business recovery expert can then assess whether the proposed changes are deliverable and whether creditors are likely to support them.
For example, a business may appear capable of returning to profit after reducing overheads, but the plan may still fail if it can’t fund wages, suppliers and Tax during the restructuring period.
The value of the relationship lies in testing both the long-term viability of the business and its ability to survive the immediate cash requirement.
How to manage creditors and liabilities
When cashflow becomes restricted, directors must decide which liabilities can be paid, which can be renegotiated and whether the business can continue to incur further credit.
Your accountants can provide an accurate breakdown of amounts owed to HMRC, lenders, landlords, suppliers and other creditors.
They can also identify liabilities that may not yet appear on the balance sheet, including upcoming Tax charges and payment deadlines.
Recovery specialists can use this information when considering options such as:
- Revised payment arrangements
- Time to Pay agreements
- Refinancing
- Creditor negotiations
- Asset sales
- Company Voluntary Arrangements
- Administration
- A controlled closure
Not every business experiencing difficulty requires a formal insolvency process.
However, the available options generally become more limited as arrears increase and creditor action progresses.
Recognising the warning signs
Financial problems are easier to manage when they are identified before the business reaches a cash crisis.
Warning signs may include:
- Repeated difficulty paying HMRC or suppliers
- Increasing use of overdrafts or short-term borrowing
- Falling margins despite stable turnover
- Rising debtor days
- Persistent aged creditor balances
- Delayed management accounts
- Regular cash transfers from directors
- Inability to fund payroll without incoming customer receipts
- Forecast liabilities being excluded from cashflow planning
Individual warning signs may have a reasonable explanation.
The concern arises when they become repeated features of the company’s finances.
For more information on the metrics to measure and red flags to watch when running your business, please read this article.
Acting before the position becomes critical
Directors often delay restructuring because turnover remains strong or because they expect a large customer payment, contract or funding agreement to resolve the position.
This can create further risk if the business continues taking orders and incurring liabilities without sufficient confidence that it can meet them.
Dealing with the issue early allows more time to:
- Establish the true cash requirement
- Reduce unnecessary expenditure
- Renegotiate finance
- Collect overdue debts
- Review unprofitable work
- Sell non-essential assets
- Engage with creditors before enforcement action begins
It also gives you more time to consider their legal duties and document the reasons for continuing to trade.
How to emerge from restructuring in a stronger position
A successful restructuring should address the causes of financial difficulty rather than only the immediate shortage of cash.
This may require you to change your pricing, customer terms, staffing, funding, reporting or the range of services provided but it may also involve closing an unprofitable division while retaining the parts of the business that continue to perform.
A painful decision but sometimes a necessary one.
Your accountant’s role is often to monitor whether the revised plan is producing the expected financial results.
Your recovery expert’s role is to ensure that the restructuring remains workable and that creditor arrangements are being maintained.
When we work together, we can provide you with a clearer view of the company’s financial position, the options available and the consequences of each decision.
The result may be a smaller business, but one with stronger margins, better cash control and a more sustainable structure.
For help, or if you’d like us to connect you with a restructuring expert or insolvency practitioner in Scotland, please get in touch.
