It has been announced that almost half of the UK’s small and medium-sized businesses sought financial support in 2020. That’s more than three times the level from the previous year.
The British Business Bank found that 43% of these companies had received external financing in 2020 including government loans and grants, compared to just 13% in the previous year.
What’s more, borrowing hit record high levels in 2020 with gross bank lending up 82% to £10.4 billion, with a quarter of the UK’s small to medium enterprises accounting of the extra borrowing.
Clearly, the impacts of the coronavirus pandemic and subsequent restrictions and lockdowns have taken their toll with many businesses facing financial difficulties.
If your business has faced cash flow problems due and is now looking to restore profitability, Clarke Bell has put together this guide on your options for business turnaround.
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What are the main causes of financial difficulties and cash flow problems?
When the money coming into your business doesn’t meet the requirements for accounts payable you can run into difficulties.
There are several reasons a business might experience cash flow problems.
- Low profits
- Too much stock
- Seasonal demand
- Bad financial planning
- High overheads including rent and utilities
- Bad company debts
- Poor credit control procedures and credit checks
If the situation has become really bad, a company might find that they are insolvent. This means that the company has more liabilities than it does assets, and can no longer to afford to pay their company debts or cover their daily bills and costs.
There are two main ways to determine whether a company is insolvent.
- The balance sheet test: this measures whether a company’s liabilities are greater than its assets. If this is the case, the company can be classified as insolvent.
- The cash-flow test: this looks at whether a company can pay its bills and debts when they are owed. Again, if your company cannot, it can be deemed insolvent.
What are my options for business turnaround?
If you are experiencing cash flow problems, there are a number of options for business turnaround open to you.
First, let’s look at business rescue and how you can restore profitability.
Company Voluntary Arrangement (CVA)
A Company Voluntary Arrangement lets an insolvent company come to an agreement with creditors to repay its debts over a fixed period of time.
With a CVA, the director remains in control of the company which will continue to operate and trade.
This is a good operation for struggling businesses that are looking for options for business rescue and can only be entered into for those that have a real chance of recovery meaning they do not have to go into liquidation.
A CVA is a legal process and as such it must be carried out and overseen by a licensed Insolvency Practitioner.
The Insolvency Practitioner will work with the directors and their accountant to draw up a proposal on how the company will pay creditors back and a schedule under which they will do so. This must be agreed by 75% of creditors and 50% of shareholders to progress.
To be eligible for a CVA a company must:
- Be insolvent
- Have real chances of business recovery – as determined by the director and Insolvency Practitioner
- Show projected cash flow forecasts that prove they will have enough funds to cover the repayment terms outline
What are the benefits of a CVA?
This is a good option to turnaround a struggling businesses with company debts as it prevents them from entering into liquidation and closing down.
What’s more, once a CVA has been agreed by all parties and the court, no legal action can be taken against the business. This gives directors peace of mind that creditors can’t issue a winding-up petition, giving you some much needed time to work on turning the business around.
A CVA also stops repayment demand from parties that are owed money, whether that is creditors or HMRC.
Unlike other insolvency processes, like compulsory liquidation which is a public process, a CVA can be a private matter which is great for directors that want to turn the company around and keep their reputation intact.
What’s more, with a CVA there will be no investigation into the directors’ conduct.
Another option for business turnaround is administration.
This is an option for insolvent businesses that aims to take control of its assets and repay creditors money they are owed.
When a company goes into administration, they are given protection against any legal action. Again, with administration an Insolvency Practitioner must be appointed who will act as the administrator. Whilst the Insolvency Practitioner is overseeing the case, no other party is able to apply to wind-up the company.
During administration there are a number of things that can happen:
- a Company Voluntary Arrangement (CVA) can be negotiated so the company can keep trading
- the company can be sold as a ‘going concern’ to another company – meaning they can carry on by keeping its clients, workforce or orders
- the assets can be sold as part of a Creditors’ Voluntary Liquidation(CVL), the creditors are then paid from any money raised and the company closed
- close the company if there’s nothing to sell.
Whatever route you take, find the best option for business turnaround with the help of Clarke Bell
If your company is experiencing company debt or cash flow problems, Clarke Bell are here to help.
Whether you are considering a CVA or administration, Clarke Bell’s team of friendly experts can help advise you on the best option to help turn around your business.
To see what we can do for you today, get in touch and talk to one of our insolvency experts.