Over the past several weeks, insolvency and companies facing severe cash flow issues have hit the headlines. Carillion announced their liquidation in early 2018, becoming the largest insolvency procedure of the year. Quickly following suit, Toys R Us and Maplin announced their failure to negotiate payments with creditors, and both retail companies have now entered the administration process. Only several weeks later, New Look, announced plans to close 60 stores as part of their CVA, with agreements in place with their creditors. Similarly, Grainger Games closed all 67 of their stores abruptly, as multiple investors pulled their credit offerings.
The recent headlines have only highlighted the necessity of carefully analysing your cash flow, and that of your clients. While it’s not always clear if a client is failing, there are several signs indicating a company’s financial health. The warning signs act as evidence of potential trouble. Business Rescue Expert, leading insolvency practitioners in the UK, are sharing the indicators your clients may be in financial distress.
1. Poor communication
Poor communication is a significant indication of financial distress. Should your clients no longer return calls or answer emails, it is a strong indication that something is not right. If you happened to enjoy an amicable business relationship, yet cannot get in touch with management regarding invoices - you should look into formal proceedings.
Alternatively, look to see how the company corresponds when you do get hold of senior management. If their tone is more formal than previous, it could signify they are undertaking legal proceedings and, possibly, looking for alleged breaches of contract.
2. Disputing invoices
Further to the above point, your clients may attempt to avoid payment by raising invoice disputes. These disputes could relate to issues with performance, stock etc. and could be an attempt to shed unprofitable contracts to save payments. Again, the tone of their correspondence could suggest something is wrong with your clients, and they could be preparing a trail of evidence. Disputing their invoices also provides the company with a little breathing time, so you should be wary of clients disputing invoices where there doesn’t appear to be clear issues.
3. Loss of reputation
Reputation is critical to the success of business. A fall in reputation - especially when it comes to payment - should set off several alarms. If you hear the company is losing trust with other clients, it’s time to sit down and get to the root cause of their issues. A huge loss in reputation can often prove irreversible, as it takes time and investment to gain back consumers trust.
Toys R Us is a prime example of a company losing reputation. Initially, Toys R Us entered a CVA, but failed to pay the debts owed at the time agreed. Subsequently, the damage of their reputation with creditors led to them entering administration.
4. Relaunch and rebranding
You should always be wary of companies rebranding every so often, under similar names. Alarm bells should ring as to why they have had to sell and rebrand previously. Is the rebrand just plastering over the initial cracks of the cash flow issues? Likewise, if a company relaunches yet offers the same trade to their consumers, without any extra income, it’s more than likely they will continue to face the same problems. In the worst case, your company could suffer a loss of reputation due to the association.
5. Low staff morale
Staff mean the difference between success and failure, and companies should always take care of their workforce. A company who doesn’t and boasts a massive turn around is instant trouble, and a huge indicator of potential cash flow issues. More often than not, staff will get a feel for cash flow issues before creditors - particularly those within the sale team. If there happens to be a feel of unease, or a high number of resignations, you can expect cash flow issues are at the heart.
6. Senior staff resignations
A sharp indicator of what is to come is senior staff resignations. If directors are leaving the sinking ship, you need to ask why. Likewise, if directors are under investigation, something is very wrong with the company. If those in charge of the company’s finances have resigned, it may be as this is their only option. We urge you to take note of these departures and, if it continues, seek immediate advice.
7. Clients refusing to trade with the company
If you have spotted any of these signs with your clients, you must speak to professionals immediately to discuss your options. We suggest attempting to communicate with your client to establish the cause and, perhaps, set out a payment plan. You can also track their company progress or obtain accounts through Companies House.
Roberto di Lauro is Partner at Business Support SpA - a Milan-based boutique financial advisory with additional offices in Singapore. The firm specialises in corporate and financial consultancy services for businesses, banks and investment funds, with a special focus on the SME market. Below, Roberto - head of the Bank Agency & Financial Services practice - tells us about the restructuring and turnaround services that Business Support offers and the firm’s approach when advising clients.
Can you detail the key steps that are involved when turnaround services are required?
It is not easy for an entrepreneur to admit that his company is experiencing difficulties. The first step, when facing the process of debt restructuring and business turnaround, is to do so promptly, critically identifying the factors that led to these difficulties and evaluating every possible solution, before adopting the most suitable one.
The assessment and management of the business in distress usually follows four main phases: diagnosis, planning, negotiation, execution.
The diagnosis allows the company to learn about the genesis of the factors that caused their financial difficulties. Timeliness of intervention and absolute criticality in reading the assessments are key factors during this phase.
The business planning is the key tool of the turnaround process: through the business plan, the company reaffirms their mission, highlighting the assets that are able to generate life blood for the core business, while eliminating everything that is no longer necessary or unproductive, with extreme focus on cost savings.
Negotiation is the most delicate phase of the entire process: at this stage the company needs to convince all stakeholders and, in particular, the creditors, of the soundness of the business plan, its ability to generate income and relaunch the company.
Execution is the end of a long period of evaluation, negotiation and hard work and represents the beginning of the process of relaunching the company.
What are the typical timescales for restructuring/turnover plans to start to have a positive effect? How is progress monitored?
Generally, there is a 10/12-month time span between the identification of the state of crisis and the start-up phase of the turnaround plan. The turnaround plan, depending on its underlying hypotheses, can begin to demonstrate its beneficial effects almost immediately. Very often, the early stages of the plans are characterized by important transactions: asset disposals, cost savings or partial repayment of loans. All these operations aim to deflate the financial tension and allow the company to activate a virtuous cycle of positive results. The monitoring of the execution of the plan usually involves periodic detection of key performance indicators. Monitoring of results must be the compass that guides the company. Since the early performance can often fail to meet expectations, this is a very delicate chapter of the restructuring process, where it might be necessary for the company to make small adjustments to their course of action.
What are the refinancing options available for Italian businesses in financial difficulty?
Today, the main restructuring and turnaround operations involving Italian firms in difficulty take place within the scope of the legal framework set by Italian bankruptcy law. As such, debt restructuring is an operation in which financial creditors allow companies to review repayment plans for their loans on the basis of a business plan prepared by the company assisted by a specialised adviser. The feasibility is assessed by a chartered accountant expert and, in some cases, by the Court of Law. When the turnaround plans manage to reach specific performance targets, many firms are able to refinance their residual debt, involving in the process the original lenders or even new ones, thus completing the restructuring process and opening the full-relaunch stage.
In the last few years in Italy, investment funds specialised in Non Performing Loans (NPL) and credit securitisation vehicles have started trading on distressed debts.
What is your advice regarding handling financial difficulties?
It is very important for any company to recognize early symptoms of financial distress, choosing the appropriate professionals to assess their financial soundness.
Considering that all companies and organisations are different from one another, the same goes for each crisis, turnaround process and solution. It is very difficult to create specific clusters and only a successful track record demonstrates how any consultant was actually able to make an impact, assisting the client in transitioning into a new phase of their business life cycle. Companies that have been through a turnaround process will be more likely to learn from their sorrow, gaining extensive experience and the tools to finally achieve their targets.
Phone: +39 346.4708468 - Tel.: +39 02.89013129
Fax: +39 02.72015926
Email: roberto.dilauro@business-support.it
Website: www.business-support.it
