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Protect Your SME Against Growing Business Failure and Brexit Fall-Out PDF Print E-mail
Monday, 31 October 2016
INSTABILITY looks set to be a fact of life for UK businesses for the foreseeable future, with the economy fluctuating, sterling devalued, and a firm outcome of the Brexit decision unlikely for some time. Against this backdrop of ongoing uncertainty, many SMEs will struggle, and there’s a real risk more will fail. How can business owners avoid this? And are there ways to protect a company now from going under in years to come?

By Alex Littner, managing director of Boost Capital

Business insolvencies have started to increase, having been quite flat for the past year. More than 3,600 companies went bust in the third quarter of 2016, 2.2 per cent more than failed during the previous three months, the latest figures from the Insolvency Service show. But, while these numbers aren’t startling, experts believe this is the calm before the storm. Many expect a big increase in businesses becoming insolvent as economic volatility dents confidence, and the post-Brexit upheaval begins to bite. Business failures in Britain could increase by as much as a third if the UK opts for a ‘hard Brexit’, according to recent findings ( ) by credit insurer Euler Hermes. It predicts continued downward pressure on the pound could squeeze cashflow and profits for many businesses, and exacerbate late payments. And companies operating in manufacturing, retail, and real estate are expected to be the worst hit, accountant Pinsent Masons believes.

Taking stock
The most important thing a business can do – and never more so than when trading times are tough – is to keep a firm grip on its finances. Try to cut waste and costs, think about rationalising the business or diversifying if some areas are under-performing, but good financial management could be the real difference between success or failure. Have strong payment procedures in place, chasing outstanding debts as soon as money is owed. Conducting cashflow forecasts at least once a month should also be the norm, as these will flag up any potential issues well in advance. As well as calculating the usual overheads, such as payroll, utility bills, and stock, take into account projected sales figures adjusted for the best and worst case scenarios.

Once you recognise there may be a financial shortfall on the horizon, it’s possible to extend your overdraft, shop around for the most appropriate type of bridging finance, or find extra funds from personal sources if possible. The Institute of Chartered Accountants for England and Wales has further tips on how to keep finances healthy, and even generating more cash in the business.

The ripple effect
R3, the association of business recovery professionals, estimates that more than one in four corporate insolvencies is caused by another business failing. This means keeping a watchful eye on the health of both customers and suppliers.

Suppliers missing deliveries can be a bad sign, as can requests to reduce payment terms. Talk to the company you’re dealing with to assess whether they’ve sought refinancing, and if emergency capital will remedy the situation, or just put off the inevitable. Industry contacts may be better informed – have there been redundancies or has the business moved to smaller premises? It’s important to judge whether these are indications of good management in tough times, or signs of distress.

Go back over contractual agreements to check terms and conditions. In particular, look at termination clauses to see how easy it is to get out of an arrangement if it looks as if a partner is in danger of going bust. If you sell goods to an entity that’s struggling, talk to a lawyer about retention of title clauses, which state whether items supplied on credit can be reclaimed by the seller if the buyer goes bankrupt. It’s a complex area, so taking legal advice is sensible.

Danger signs
If you recognise your own business is in some difficulty, consider reducing your salary, and even staff working hours. It may be necessary to rearrange jobs and rejig employees’ responsibilities, but always check that any changes don’t breach employment regulations before reassigning roles.

So, what are the clues your company is in genuine crisis? Some classic signs include:
- Receiving final demands for payment
- Struggling to pay bank or loan repayments, tax bills, or outstanding trade debtors
- Inability to draw money from the business to cover costs, or running up unaffordable debts on personal credit cards to make ends meet
- Being over the business’s overdraft limit, and looking to increase borrowing with no idea of how to repay debt in the future.

If you reach this stage, seek help from a qualified professional as soon as possible. A guide to finding a licensed insolvency practitioner is produced by R3, which recommends avoiding unscrupulous, ill-equipped advisers who prey on ailing companies. And, of course, talk to your accountant, the most trusted business adviser for many SMEs.

Times may be uncertain, but businesses can take positive action for the future. Keep a watchful eye on your business, adjust to the current trading environment, and, above all, remain in control of company finances. All of these should help your enterprise navigate any choppy waters the Brexit vote creates.

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