Wednesday, 6 March 2013

Sleepwalking into business failure

By Amanda Vigar, Managing Partner, V&A Bell Brown LLP

We may tentatively be emerging from one of the longest double dip recessions in recent history, and may even be sliding into a triple dip downturn. Many businesses have gone to the wall and many others have, sadly, turned into ‘zombie businesses.’

Zombie companies are the living dead in our economy.  They are only capable only of servicing interest payments on company debt rather than making inroads into it. They are alive – but barely – thanks to government help, monetary policy and, often, the reluctance of lenders to write off bad loans since the crisis. Many have even been going down the deeply worrying route of servicing business debt using director’s personal cash reserves, or even taking out personal loans to keep their businesses afloat.

These ‘living dead’ companies are now being strangled by their capital structure and mistakes of the past. Many of these were already faltering businesses that took on debt based on a pre 2007 plan, but there is no way, on current performance, that this debt can be paid back. As the country emerges from recession, firms starved of investment will suddenly need more cash, but will not be able to attract the required funding because they haven’t been servicing old debt adequately. These companies are unable to invest in new equipment or future growth areas so can partly be blamed for the weak recovery.

So what can zombie businesses do to help themselves?

  • Each week, predict where your bank statement will be the following week.
  • Stop paying with cheques! Controlling when cash leaves the account is vital for healthy cash-flow and electronic payments are normally much cheaper than cheques!
  • Minimise the number of standing orders and direct debits unless you get a healthy discount for paying this way. This will help keep the timings of payments within your control.
  • If a client is behind with payments, stop selling to them until they are able to meet the terms agreed and ask for payments up front!
  • Negotiate better payment terms with suppliers. For example, if you can’t get longer payment terms try to secure discounts for early or block payments.
  • If employees wish to purchase anything, ask them why, if they had to spend their own money would they still need to buy it? Helping your staff to take responsibility for cash-flow will reduce waste and save you cash.

Amanda Vigar is Managing Partner at V&A Bell Brown LLP, a Holmfirth-based firm of accountants specialising in all aspects of accountancy and tax affairs on behalf of small and medium sized businesses. The company is part of the V&A Group which also includes V&A Vigar & Co LLP and V&A Corporate Finance. The V&A Group also gets involved in turning around struggling firms and advising on sales.

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