Are my clients facing financial distress?
As mentioned above, there have been several notable examples of companies facing closure. Carillion announced their liquidation in early 2018, quickly becoming the largest insolvency procedure in recent months. Following suit, both Toys R Us and Maplin entered administration procedures. The former initially proposed a CVA, but failed to keep up the creditor payments, thus entering administration. Only several weeks later, New Look announced their plans to close 60 stores, proposing a CVA with financial agreements in place with their creditors. Carpetright and House of Fraser are also companies facing issues with cash flow, and looking for alternative business finance options.
As a creditor, you will have limited access to financial information from your clients. However, there are signs that can provide indications as to a company’s financial health.
What are the signs?
These signs act as an early warning, helping to protect your interests.
Poor communication, or even a lack of communication, may provide a strong indication that all is not right. If you cannot speak to senior staff regarding an unpaid bill, you should seek advice – particularly if your clients are no longer taking phone calls or answering emails. If you do get hold of a director, look to see how they respond to your questions. Can they satisfactorily explain any recent changes or problems you have encountered? If not, it could signify a threat to your future trading relationship. You may also need to consider sending invoices on pro-forma terms, as a suitable option for the long-term.
As a result of the above, your clients may dispute invoices for breathing space. Initiating the disputes means they have more time to adjust their cash flow, or locate alternative sources of business funding.
Reputation is critical to business success. A significant loss of reputation often precedes insolvency procedures, as the client struggles to retain their share in the market. Alarm bells should start to ring if the client is losing trust of consumers.
Toys R Us is a recent example of a company facing a loss of reputation with creditors. Toys R Us initially proposed a CVA, with payment installments in place to recoup losses for said creditors. Unfortunately, Toys R Us could not keep up with the repayments, with the CVA failing and the company entering the administration procedure.
Has the client re-branded?
Be wary of clients that relaunch and rebrand regularly, under different names. You should ask why they have had to do so. Is the rebrand plastering over the financial issues the original company faced? Take note whether any provisions have been put in place to avoid the same cash flow problems as before. They may have just rebranded in an attempt to improve sales, without a new source of income. Thus, they are likely to face the same issues.
Lack of staff morale
Employees, typically, get a feel for a significant change – such as financial issues or even the possible winding up of the company – before creditors. If there has been a change in staff morale, or the company boasts a high turnaround, you might ask why. Staff can be the difference between success and failure, and a company that doesn’t look after their workforce can indicate trouble.
Senior staff leaving
Senior staff resignations certainly highlight the need for urgent advice. Paired with low staff morale, senior employees leaving the company can be a warning sign of potential financial distress.Often, employees responsible for company finances may resign as they believe this to be the only option, which suggests cash flow problems are at the heart of the staffing issues.
You can use Companies House as a resource, where you might discover if any senior resignations have been made, obtain statutory and annual reports and gain a feel for the cash flow.
If you have spotted any of these signs with your clients, and you are at all concerned that it may affect your company cash flow, don’t hesitate to contact one of our business rescue experts to discuss your business finance options.