How to protect Your Business – The tell-tale signs
I have been reviewing the construction output statistics and, they paint a marked improvement for the construction industry. According to the Office of National Statistics, the estimated total volume of construction output in the fourth quarter of 2014 increased by 4.5% compared with the same quarter of 2013.
Construction statistics at the Insolvency Service and the latest figures (published in April 2015) show that there were 2,835 construction company insolvencies in 2014 compared to 3,431 construction company insolvencies in 2013. This is a 17% annual decrease.
It should be noted that Company insolvencies consist primarily of compulsory liquidations, Creditors voluntary liquidations, Administrations, Company voluntary arrangements and Receiverships.
So bearing this positive trend in mind the last thing that you need, in this current climate, is to be faced by a client that is struggling to pay your fees due to their own cash flow problems or a supplier being unable to deliver what has been promised because of their own failings.
Either situation may cause undue stress on your business, place strain not only on your cash flow but also on you, and soak up much of your time that could be better spent on driving your business forward.
In this article we will look at how you can best protect your business by interpreting the data that you have, spot your potential exposure with clients and suppliers alike and provide you with a brief understanding of the possible ways available to manage this risk.
Here are some tips on how you can best protect your business.
Credit Checks and Companies House Searches
This is an essential part of your diligence checks either before accepting a contract or engaging a supplier. Remember you need to do this in the good times as well as bad. Although normally undertaken from the outset, such a review should also be be part of a regular monitoring process of all your contracts, especially if it is for a long term. The reason being is that situations change and accounting information that you receive is of historic nature and so may not show a true reflection of how things actually are now.
Companies have up to 9 months after their year-end to file accounts at Companies House, so if they are delaying filing to the last minute or are late, don’t be afraid to ask why and to see a copy of their latest accounts. Never feel embarrassed to ask questions.
Interpretation of Financial Information
Having obtained your information, the next step is to try and understand what it means. You may spot a ‘show stopper’ straight away, but generally there will be a number of factors that you will need to consider. These will help you to build up a picture in your mind about the company.
Credit checks will often provide you with a number of year’s data, enabling you to spot trends in the business.
Is the balance sheet in negative equity? This is where its total liabilities exceed its assets. In other words if it were to stop trading as of that moment the company would not be able to pay all its debts as and when they fall due.
Look at the makeup of its liabilities. A quick calculation of the trade creditor day’s ratio will give you an idea of how long that company takes to pay its suppliers. Are they slow payers? Have you factored this into your own contract cash flow model? Or are you expecting 30 day terms?
Ask yourself how they are financing their business. Have they got significant loans outstanding and if so who with? If it is with their bank, has there been an increase in the security requested by the bank ? Has a charge been put on the company’s assets ?
If they have a loan is it from another group or associated company, will that company continue its support? What is the financial situation of that company? Or are you potentially dealing with a pack of cards? If one collapses then do they all collapse ?
If the financial statements are audited then you may decide to place some reliance on the fact that fixed assets are valued at the lower of cost or net realisable value. That adequate provision has been made for bad or doubtful debts reflecting in an appropriate value for trade debtors, but what about other debtors? Is the balance sheet bolstered by an inter-company loan, in which case what is the likelihood for that to be paid? Again look at their financial situation.
The notes to the accounts will also provide much needed information. Was the audit qualified and if so why? What is their revenue recognition policy and have they strayed from using accepted accounting principles? If so how does this affect the accounts?
Spotting Financial Difficulties
As your relationship progresses you should always keep things under review, this will help you spot the early warning signs that there may be difficulties ahead and enable you to make timely and effective decisions to preserve your position.
It is imperative to also look for signs of operational and management dysfunction.
Keep an eye on the way in which your customers and suppliers change the way that they do business. If you notice a sudden move to a different type of service or selling different type of product then, it may be that they are in trouble. If they randomly start to slash their pricing then they may be trying to sell as much as they can in order to increase volumes in sales to get more cash into the business. This is often a sign that they are either in the process of selling certain parts of the company or that they have creditors knocking at the door!
Another common sign of distress is deterioration of services and products. Often early signs of a possible problem are companies’ cutting costs and there tends to be a lack of management in quality and control. Keep an eye on who the directors and key company staff are and see what changes are happening at companies’ house on a regular basis. Resignation of directors or a sudden change in management can be innocent but needs to be reviewed and monitored. If you start to see some of the above changes appearing then be sure to communicate and ask questions.
Managing Creditors & Debtors
Managing your creditors and debtors is a key part of any company wanting to be successful, trade profitably and ensuring a healthy working capital. The best way in achieving easy cash flow is through your own business by making sure that you pay your creditors on time and vigorously control and collect your debtors.
One of the biggest problems for businesses is getting paid in a timely manner by their customers. So often customers choose either to delay payment to improve and suit their own cash flow or attempt to compromise the cost of products and services once they have been received or supplied.
The company’s liquidity position is determined by the amount of debtors you have. Getting the balance right is important in determining what monies are available to your business in the short term, and for identifying the cash, or working capital, needed for your business. As a company, you must allow and include in your cash flow the costs associated with giving credit. Keeping accurate records of how much money you are owed, who owes the money and the date of when payment is due must be monitored regularly. Implement a policy to ensure that regular reports can be printed for review on a weekly basis these will guide you into monitoring key suppliers and customers and how lenient you need to be in terms of how you do business with them.
Put in place a policy of levying interest on overdue account payments. This often targets suppliers in paying sooner rather than later. Ensure that these are printed in bold letters on your terms and conditions so that they are easily read.
Take action as soon as one of your customers fails to pay! Legal action is often used in haste. Communicate with your customers and ascertain the reasons for non-payment. It is vital to manage effectively the ins and outs of your business in order to ensure that it shows you the difference between your business making it or breaking it!
Companies try to maximise the credit terms by paying on the last date of payment. The market tends to affect companies that rely on just one or two customers. If you are in this category then it only takes one customer to change their supplier or to stop trading to put your business at risk. It is important not to put all your eggs in one basket. A phrase used time and time again to ensure that you are spreading you risk.
Understanding Your Options
If you have established and have a good working relationship with your customers then it can be very difficult chasing them for payment. It is easier to appoint another senior person from the company to communicate with the customer in order to ensure that emotions do not get in the way. WORK ON THE BUSINESS NOT IN IT !
Make sure you take in to consideration the key points:-
1. Have in place a robust policy of terms, conditions and contracts in writing which is binding. It should include a clear outline of the goods and services and a clear understanding of your charges.
2. Include interest charges in bold where it is easily legible.
3. Suspend services and or the providing of any further goods until balance outstanding is paid
4. Send invoices in timely manner and chase immediately as payments become overdue. Point them to your terms, conditions and contract.
5. If payment is still not made then a letter demanding payment should be sent as a matter of urgency. You should state that the terms of the contract are terminated forthwith and legal action will commence unless payment is made immediately.
6. Obviously the last course is to take legal action.
How Can I Help? If you require additional information, or some formal advice please do not hesitate to contact me on: 01494 786 000 or 07961 116 321 or email me firstname.lastname@example.org
DISCLAIMER This blog / article is for information and interest only. It is not a substitute for full professional advice, which will take account of the specific and individual circumstances surrounding your matter. Navigate Business Recovery Limited cannot accept any responsibility for any loss arising as a result of any person or organisation acting or refraining from acting on any information.