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DMH Stallard
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Frank Bouette, Partner and restructuring and insolvency expert at DMH Stallard, offers his view on the current economic downturn, and provides some practical tips on how to steer your business through the looming recession
SEIZING THE OPPORTUNITY
an economic downturn creates while avoiding insolvency
It’s not radical to say we’re heading towards, if not in, recession. Raw materials, inflation, interest rates and borrowing costs are rising, meaning consumers have less to spend. The Chancellor’s last budget was a stabiliser, and the next is expected to be the real one, with some pain attached.
Commentators suggest this recession will be a long slog, the longest since records began in the 1920s, with stagnating wages, rising unemployment and reduced spending – all hitting margins. Businesses will have to make tough calls and, inevitably, business leaders will be considering how to navigate choppy waters and avoid the risk of insolvency. But is it all doom and gloom? For the diligent and innovative businesses, there will be opportunities to create growth whilst others will face insolvency.
‘Zombie businesses’ are ones that don’t produce enough profit to cover their debts, and just cover their operating costs. An increase in the number of ‘zombie businesses’ has arisen since the 2008 banking crisis with many hanging on because politicians have short term aims, letting bankers bear the entire blame.
Institutional funders have consequently been highly reluctant, if not entirely averse, to pulling the plug on zombie businesses in case of criticism in the mainstream press. Their hands are tied
by politics and fear of backlash, when the economy would benefit from it.
A wise business person once said to me “mediocrity has a long half-life”, and it’s generally proven to be true. Zombie businesses perform averagely at best. They don’t grow or innovate.
Pandemic support gave them a false sense of success – free money. Their models are usually dated and owners are reluctant to modernise. They tie up market share and block growth. A recession will help bring them to a close, freeing up the space for successful businesses to step in and create growth – creating opportunities and enterprise, but meaning some will face insolvency.
The journey won’t be easy. It will hurt and there will be many challenges as spending tightens, and margins are squeezed across the board. However, this is the chance for a long needed economic reset, and there will be opportunities arising from it, for the enterprising. Good businesses need to take care to ensure they weather the storm and are ready to seize the opportunities for growth when the time arises.
So, what can good businesses do during this time to ensure survival and avoid insolvency?
1Things move quickly (the Truss administration demonstrated that). Up to date management information is essential to monitor performance and identify issues early (particularly cash flow pinch points). If your data is a month old, you’ve lost a month’s chance to remedy issues. A lack of reliable management information is a key factor in many business failures.
2Don’t be an ostrich. The earlier you identify and tackle an issue, the more options you have. Too many businesses take advice too late, having waited until an event has taken away their ability to control the timetable (e.g. they had a winding up petition served), meaning their remaining options are limited.
3Engage with stakeholders, particularly your suppliers, if you’re facing a cash flow blip. If you ignore them, you’ll force their hand, and precipitate action that may take matters out of your control. Negotiate a repayment schedule if you need to. On the flip side, don’t be afraid to chase your customers for payment – you’ve agreed a price and supplied after all. Also don’t forget to read T&Cs properly before you sign them. Make sure your customers sign yours.
❛❛ A wise business person once said to me “mediocrity has a long half-life”, and it’s generally proven to be true ❜❜
4Co-operate with the bank, particularly if they have security – they won’t go away and will see through attempts to fob them off.
5Don’t be tempted to bill earlier than the contractual time (or outside of your invoice factoring arrangements). It may seem like an easy short term cash flow fix, and you may think it’s just the once, but my experience is that it will snowball; and it’s rare that anyone ever catches up with the financial hole it creates.
6Work on your business rather than getting caught up in it. You love the day job, but don’t forget to keep your eye on the horizon and what’s coming over it. Also, put your ego aside, and put your business first. The flash car is nice, but your business is your livelihood and that of the staff you employ. 7 If you’re a director, be mindful of your duties and document the reasons for your decisions. If the worst comes and the business does go into insolvency, documentary records of your decision-making process can be a life saver, at a later date when the guns are out for you personally.
8If in doubt, take advice on your options. Don’t necessarily rush to close the doors without considering matters properly. In some cases it can make matters worse. A managed process generally achieves a better result for stakeholders. Expert insolvency advice will assist.
9Don’t be afraid of the ‘insolvency’ word. The best businesses face difficulties, and there are a variety of tools and experienced professionals who can help you navigate distress, and come out the other side. The thrust of the corporate insolvency legislation is to promote enterprise, without fear of failure. After all, the 2002 insolvency changes were called the Enterprise Act!
