Are we heading for a recession? What must businesses do to prepare?
Insolvency Practitioners are here to help Businesses make the decisions needed to avoid Insolvency
The pressure on businesses has been rising for several months now, with supply chain issues, rapidly rising inflation and, especially, the shock of soaring energy prices caused by the war in Ukraine. The latest Bank of England forecast on 4th August for a full-blown recession, along with inflation peaking at 13.3% in 2023 came with a significant rise in interest rates to 1.75%. This will put significant pressure on very many businesses, especially SMEs, who are already struggling to recover post Pandemic. In this article our Insolvency Practitioners look at the signs businesses need to be aware of as underperformance becomes financial distress or crisis and how we can help them take key steps to help maximise the chances of avoiding insolvency and prepare for the difficult times ahead.
There are 5.5 million small businesses in the UK
It is often the big companies and corporations that take the headlines when it comes to declining sales and profits and job losses during recessionary times. However, as the Federation of Small Businesses reports – there are 5.5 small businesses in the UK (with 1-49 employees), and they account for nearly 50% (12.9 million) of total employment and 36% (£1.6 trillion) of private sector turnover. These are big numbers and these companies are the backbone of the UK economy, but they are very often the most vulnerable to the pressures now being seen in the UK economy.
What are the signs to look out for?
We group the warning signs into 3 categories:
- Underperformance. Sometimes difficult to spot, early signs include:
- A lower-than-expected bank balance,
- Surprising use of an overdraft facility or
- Lower profit margins.
Business owners need to keep a close eye on the key metrics they have identified. Such issues can be managed for a short time. However, if, for example, inflation forces up costs, swift and decisive action might be needed to maintain margins longer term. Likewise, businesses with lots of debt need to watch interest rates closely. It only takes a relatively small and sustained rise in interest rates for debts to become much harder to service.
In our experience, when underperformance is spotted, tough questions need to be asked and early action taken. Often, the solution is not simple and getting support and advice is better than waiting and hoping for things to get better, as things like liquidity or cash flow problems rarely fix themselves. Insolvency Practitioners are specialists in getting to the root cause of business underperformance and recommending the changes that are needed to improve things.
- Financial Distress. As the Insolvency Service’s recent insolvency figures have shown (where the number of company insolvencies in Q2 2022 was 13% higher than in Q1 2022 and 81% higher than in Q2 2021), businesses can move very quickly from underperformance to crisis. 6 key signs of financial crisis are:
- On-going cash flow problems
- High interest payments
- Defaulting on bills
- Extended creditor or debtor days
- Falling margins
- Increasing stress levels
- Once again, the sooner help and advice is sought from an Insolvency Practitioner, the more that can be done to turn things around. If a business has left it too late and is already defaulting on an HMRC Time to Pay agreement or cannot pay the wage bill or meet the growing demands of other creditors, it might be difficult for the Insolvency Practitioner to avoid a formal insolvency process.
- Some of the key things that Insolvency Practitioners will look to implement to turn a business around are:
- Getting tighter cost controls in place
- Implementing more effective credit control
- Agreeing new payment terms with creditors
- Stripping out unprofitable product lines
- Longer term, working to change a company’s culture and working processes.
- Crisis. If financial distress develops into a full-blown crisis, then it is likely that a formal insolvency procedure is required. If parts of a business can be saved, then an Administration might be appropriate. Likewise, if a company is able to enter into a formal arrangement to repay some or all of its debts over a fixed time scale, then a Company Voluntary Arrangement is possible. If neither of those two procedures are possible, then Liquidation is the only remaining option.
Our First Aim is Always to Help Save Businesses and turn them around
R3, the Association of Business Recovery Professionals, is our industry body. In its latest survey from 2019: The value of the profession: how insolvency and restructuring supports the UK economy – it found that the Insolvency and Restructuring profession:
- Rescued 7,200 businesses;
- Saved 297,000 jobs;
- Returned £1.82 billion to creditors;
- Advised 60,000 businesses and 144,000 individuals.
Indeed, c.40% of the profession’s procedures were either Administrations or Company Voluntary Arrangements – in other words turnaround rather than liquidation.
At a time when we are noticing a significant upturn in enquiries from businesses who are really feeling the heat, it remains the case that the earlier we are called in, the more we can do to help distressed businesses. This includes those with cash flow difficulties, creditor pressure, large tax bills, uncertain turnover and even the problem of difficulties paying back Bounce Back Loans.
We have over 25 years’ experience helping and advising business owners with financial difficulties, and in that time have dealt with over 2,500 companies and individuals. Click here to see some of our testimonials.
Our aim is to help save businesses and the livelihoods of their directors and employees. If a formal insolvency solution is needed, we are Licenced and Regulated by the Institute of Chartered Accountants to give insolvency advice.
We know that many thousands of businesses are already suffering financial difficulties right now. We are here to help rescue as many as we can.
If worrying about your business is keeping you up at nights, it is time to speak to one of our insolvency specialists. The sooner you contact us, on any of the numbers below, the more we are likely to be able to help. The initial consultation is free, and without obligation.
Also K&W Recovery, trading as Antony Batty and Company, Thames Valley: