Banks; Friend, or Foe to SME's?

Having read over the weekend of yet another breaking banking scandal is it not about time these disgraceful fat-cats were seriously taken to task? As a company turnaround consultant I come into contact with the shameful banking practices on a frequent basis. This latest ‘revelation’ headlining the newspapers is not news to those of us in the insolvency business as there have been suspicions for years around the insolvency practices and banks. A lot has to do with the banking culture itself which has become more and more arrogant and remote from its original purpose – to lend and provide services to its customers.

Successive governments have had far too close a relationship with the banking heads. The most notoriously bad banking and political relationship was of course between Fred Goodwin, ex RBS boss and Gordon Brown, who has arguably been deemed "the worst chancellor ever".

Gordon Brown appointed Goodwin of all people to advise on the regulatory aspects of banking and sale practices and duly gave good old Fred a knighthood in gratitude. The appointment of Goodwin advising Gordon on banking regulation was not so much the blind leading the blind, as the equivalent of King Herod being asked to advise Mothercare on the latest range of comforters. It should not, therefore, come as any surprise that on top of the rate swap mis-selling debacle we now have this latest, equally shameful list of accusations against RBS of stealing property at an undervalue.

We come into contact with situations like this through our line of work and one example could be a recent case where a director was sold ‘insurance’ to cover his company against rising interest rates until, you guessed it, the interest rates fell and his cash-flow was destroyed. This was an interest rate swap product and even though he complained, he got nowhere with the bank and eventually the company went into default with his mortgage payments – the actual mortgage he had ‘insured’ and trying to protect.

The director had secured a RICS valuation for over £2m and yet, just one year later when the company, now starved of cash due to the horrendous interest rate payments he was paying to the bank, was forced into company liquidation. The bank appointed liquidators then sold the property off at a value of £800,000 knowing that my client had personal guarantees in place further protecting the bank. He not only lost his business but also his wife, having long suffered the pressures of supporting a stressed husband, she had finally had enough. He also lost his children and immediate access to those that made his life worthwhile. All this because greedy individuals looked after their own interests first and believed they had the right to do what they could with no thought that they may be doing wrong. But these ‘scams’ do not only involve bankers, they drag in the associated large insolvency practitioners who sit on the banking ‘panels’ as they may have too cosy a relationship with the banks. This may be another area for investigation by Vince Cable who appears to me to be one of the few politicians with any sense of integrity. 

Of course the newspapers rightly focus on the lost businesses and the hardship that this causes, but what it also does is knock our confidence in the established banks and the establishment itself to an extent. It is hardly surprising why banks are so despised; try getting a commercial loan, or worse a mortgage and the banks get tighten-up. Any mortgage applicant is treated like a criminal as they have the audacity to dare borrow money to improve their lot. 

Of course this would be funny if there wasn’t a more serious side to it and the serious side is the human fall-out of the pressure that these scandalous banking practices bring about. The fact that the Co Op Bank, set up to serve its members has been brought to its knees with £1.5billion gap means pensions will be underfunded and genuine investors will lose money. 

The banks have a lot to answer for and there does not seem to be any end to these banking scandals that have hit every man woman and child in this country and arguably the western world. The bigger question is what do we do to put this right? 

Written by: Mike Smith

Where to Turn for Business Advice?

Most people in business will have suffered a sleepless night or two when cash-flow problems loom, but where do business people turn to when they need someone to help? Loved ones are usually out of the question as they will inevitably have been contaminated by the emotion of the situation anyway. The old days are gone when you could sit down and talk to your local branch manager who knew you well and had the authority to make the decision for you. Nowadays, you are more likely to be sold something completely worthless by a ‘relationship’ manager who is probably too young to even have had one – a relationship that is. The Citizens Advice Bureau are not in a position to advise if you mention the word business and debts in the same sentence and besides, they are becoming few and far between as government cuts dig deeper.

A religious belief of some kind can provide someone who simply listens, but you are unlikely to see a burning bush, or have a revelation that indicates a way forward.

It seems that the internet has been the saviour of some who are able enough to switch on the laptop and search for help. Certainly we get our share of truly dreadful and often heart breaking accounts of how someone has found themselves in difficulty.

Despite what most believe, business people in trouble are not all directors shirking their responsibilities, though it is easy to see why it may appear so when you are a creditor and a company that owes you money enters company liquidation. From experience usually around 20% are forced to close through an outside unforeseeable incident such as stroke, heart attack, sudden death, or the impact of a family death, or long term illness. A further 30% are often guilty of no more than putting too much faith in a particular project, or company, and OK it may be mismanagement, or simple inexperience, but we all have to learn.  Making mistakes whilst learning can be a very expensive way to learn, so this should be avoided at all costs – consult a professional.

For most small businesses they may turn to their accountant, but this is hardly fair on them as in most cases they will see a client once or twice a year if they are lucky. The medium sized companies may have an in-house bookkeeper/accountant, but they will be too close to the problem and unfortunately in my experience usually, unfairly, carry some or all of the blame for the company predicament. If you are a sole trader or a partner in business it is likely that the first person you speak to is either your life partner, and or business partner. Either is a mistake and often leads to the ‘blame game’ which in turn applies negative pressure on the relationship. It is a sad fact of life that around 60% of those contacting us will be separated, divorced or splitting up. We sometimes forget the impact on families business stress can have.  

If the business is not viable and you are a sole trader then there is no difference between personal and business debts. It is not better, as was suggested by a recent client that; ‘if you are a partnership then your debts are halved aren’t they?’ The answer is it is not as simple as that and it can be worse in some cases where, as is usual, one partner has no assets and the other has lots. Unless you have a limited liability partnership and or a legally binding partnership agreement then the debts will be joint and several. So if your partner is about to sign a contract for a new BMW on the partnership business account you may want to hold back the signature as you could end up paying for it if things go badly.

You would think directors would do better when the company has limited liability? Not so, as banks and suppliers obtain more personal guarantees and security for provision of supplies or lending. Unfortunately if the company does end up in liquidation the insolvency practitioner is not allowed to help the director by regulation. If you think about it this makes sense as the insolvency practitioner acts in the best interests of the creditors not directors. Whilst an insolvency practitioner must have due care for a director with a personal guarantee they cannot give direct advice on the personal guarantee when acting for the bank as this is a clear conflict of interests. Of course the biggest taboo subject for an insolvency practitioner and guaranteed to make him/her to go pale prior to being engaged is the subject of an overdrawn directors' loan account. In liquidation, this can have very serious personal implications for any director and the insolvency practitioner will be duty bound to pursue these on behalf of the creditors, even to the point of bankruptcy. Remember who the ‘practitioner’ is acting for? This situation should be discussed in detail if an insolvent liquidation is being considered as a potential solution. There are unscrupulous ‘practitioners’ who are well known in the business who will actively seek out naïve directors seeking a ‘liquidation bargain’ and thinking that they are being adept by obtaining the cheapest liquidation on the internet, the truth is this could not be further from the truth. If a liquidation fee seems too good to be true then it probably is and there will only be one loser.

If a liquidation is being recommended to you as a solution ask direct questions and get straight answers and if need be get confirmation in writing as to what the process will be, before, during and after liquidation. If in doubt, ask to speak to past clients and check for testimonials on the ‘practitioners’ website. If a director entering into liquidation does not perform these very simple checks then they do so at their peril.  Just as the internet can be a saviour it can also be a dangerous place too.

Your accountant may know someone who will not simply and automatically think of liquidation as the first port of call and if you have seen previous blogs you will know this is unlikely to be a modern insolvency practitioner. You knew I was going to say "seek out a business turnaround consultant", but I genuinely think this is the best option in today's business climate. They are used to working in high pressure and insolvent environments and if they are any good they will provide initial free advice and even solutions for you.

Whether you are a director, sole trader, or a partner, if you are having severe cash-flow problems and you are worried about your personal situation you should be speaking to someone who looks after your interests whilst having due care for the creditors? Someone who is well used to negotiating with creditors and someone who has earned their stripes through having managed many businesses, gaining hard business experience. Doesn’t that make more sense? Do yourself a favour and seek out a business turnaround consultant, you can learn more here at the Turnaround Management Association http://www.tma-uk.org/.

Do insolvency practitioners do turnaround?

I read a very interesting article recently highlighting this question and it may seem an odd question to ask, but do insolvency practitioners actually rescue companies, or simply put them into liquidation? Put plainly, do insolvency practitioners rescue companies? The question was posed by a well-respected rescue CEO and consultant with over twenty years in rescuing businesses. My experience is, I have to say, not good when answering this question. I have been advising large medium and small companies for over thirty four years now and rescuing a failing business is not for the faint hearted, that’s for sure. So why is the question even being asked? Well I suspect this well respected gentleman has had similar experiences to me over the last five years or so, through the heat of a recession.

Unfortunately, I do believe insolvency practitioners generally have lost the appetite and more importantly lost valuable experience in rescuing companies and have put more focus on more expedient liquidations. In the last year alone we have been contacted by around 2-3,000 company directors seeking business debt advice. The majority of directors that we have advised who had also spoken previously to competing insolvency practitioners were genuinely surprised and greatly relieved when we discussed how we may be able to rescue the company and not simply put it into company liquidation. Now, it is not possible to rescue all companies and I accept there are a lot of so called zombie companies out there, but shouldn’t we at least work from the premise of ‘how do we save this company’ rather than how quickly can we close it?   

Certainly the majority of insolvency practitioners appear driven more by regulatory and compliance matters than saving the company. I guess this is understandable when they are subject to spot checks and can lose their licence if not completing procedures thoroughly enough, but is this the real reason or a symptom of something else?

    

Over the last five years or so, since the recession, we have seen and heard of serious investment in compliance policies and procedures which has turned into an entrenched dogma creating a completely different type of insolvency practitioner to that which existed 7-10 years ago I suspect. There is something else though when you look at the increased numbers of staff. The new kids on the block don’t know anything else other than compliance, regulations and following the necessary processes and many have no first-hand experience of rescuing a company, or negotiating with creditors over business debts.

With the economy improving and the Insolvency Service cutting down in size, it may be that a downturn in insolvent liquidation cases may well be followed by a number of insolvency practitioners starting to struggle and being taken over. It may seem improbable, but there is already evidence in the market place that insolvency practitioners are trying to change their approach as they begin to struggle. The insolvency practitioners that cannot adapt to the changes will struggle to survive in a market where desperate practitioners are already pushing liquidation fees down in an attempt to reel in more business whilst their profit margins get squeezed. A note of caution here; far too many directors do not think to check the website of insolvency practitioners for genuine testimonials, or ask to speak with the insolvency practitioners' past clients. This should always be the first action that any company director should take who is thinking of engaging, or referring an insolvency practitioner.

The 'big boys' appear to have swallowed up a significant portion of the ‘company rescue’ talent, but not every SME can afford their fees and in any event, these bigger firms of insolvency practitioners will continue to ‘cherry pick’ their clients based on certain prerequisites. The average SME traditionally turns to his/her accountant for help and that is as it should be as the first port of call. Perhaps the SME accountants should check who they refer their clients through to in future more than they previously have when they want a company to be rescued?   

Back to the question: Do I think insolvency practitioners do turnaround? Well, the larger clients will probably be able to afford the big names, but the smaller companies are left to a roll of the dice as to whether someone will genuinely try and turn the business around, or simply put it into company liquidation.

 

There is a simple solution though – check the websites and how about asking to speak to past clients? 

Coming Out of Recession – Good News for business?

We are coming out of the longest recession in recorded history so this has to be good news doesn't it? The UK economy, we are told, has the strongest forecast in Western Europe. So, if the signs of consumers finally opening up their wallets are there then struggling companies across the UK should be pleased, and they can pat themselves on the back as having ‘made it through the storm’, right? Well not really. I don’t want to be a dampener on a struggling director’s hopes as there are indicators we can be cautiously optimistic about. The problem is based on past experience having been through three recessions that the most dangerous time for a cash-strapped company is when coming out of recession. The reasoning behind this is simple. If the ‘struggling’ company has cut back to the bone and cannot raise personal finance; ploughed in personal/family cash; reduced staff; sold off assets/stock; maxed out the company credit card and the banks being as helpful as ever and refusing to lend – the ‘straw that breaks the camel’s back’ is usually an influx of new orders.

You may think this is nonsense and that any bank with an ounce of commercial common sense would see a full order book as an indicator of something positive. Not so. We have had many cases where the order books have been full to the brim and the banks have refused to even provide an overdraft. They (The bank) did by the way allow an unauthorised overdraft of as much as the company wanted but at 27.9% APR. Factoring may help but my experience is this usually creates more problems than it solves for smaller companies.

So when orders start to increase and the bank account is empty what can directors do? There are few points to remember. Take a common sense approach and remember that when a patient has been very ill and is still very weak then start with a little of the right food often rather than gorge on too much of anything all at once.

My meaning here is that is important to gear up slowly if the company is cash-strapped and do not over trade and take too much on board. It is easy for a director to convince themselves that the more work you do the better things will get. Not necessarily – it could make matters worse. The fastest way to lose a good name is to let customers down. So, it’s important not to take work on that cannot be fulfilled competently and effectively and getting paid.

A director should set reasonable achievable goals and make sure the accounts/finance department talks to sales and is able to fund the growth. Ensure regular and frequent meetings are taking place and this is the time the director must have his/her finger on the pulse and work even harder and smarter.

If directors are a ‘one man band’ then they should be talking to someone other than a life partner/spouse that will provide an objective, informed unemotional view of the situation. This is an ideal time for the accountants to step in and provide support I would suggest. Whoever the director talks to they must keep the dialogue on-going until the company is back on its feet to make sure there is no disconnect between the service you have provided and what is paid in – not owed in. A business can grow on promises of payment – they need cash.

The nature of the business the directors are involved in will also matter. For example if they are in a building related trade then it may easier to get clients to fund at least part of the project with up-front cash. This can make a big difference to the chances of survival and not. This course of action may be more difficult with other businesses and directors will need to work smarter when providing the services to the client. For example is it worth having a word with your key supplier and showing them the full order book and offer to make them the sole supplier so they can see the benefit of increased sales.

Whatever the director does they must take care and whilst it is good to be cautiously optimistic it is foolhardy to believe simply obtaining lots and lots of extra work in itself will solve the problem – it may just make matters worse. Take care out there. 

Written by: Mike Smith

Who takes care of who when a business is insolvent?

When a company becomes insolvent the directors must take great care to fully address their duties and responsibilities; even more so than usual, as they will be watched very closely if they require an insolvency practitioner step in and process an insolvency solution for them.

Why is this? Simply put, as soon as an insolvency practitioner is engaged as a liquidator their main duty is to the creditors not the directors so your personal interests are not looked after by the liquidator once they have been engaged. For example increasing the overdraft within the normal day to day running of the business  would not be an issue, but what happens if matters start to go wrong? You may require personal help during the liquidation process and often afterwards. So who do you turn to if you can't go to the liquidator, surely they are there to advise you? Normally, you would need to engage an external consultant to advise you personally while the liquidator does his/her job. This is not the case with Jameson Smith & Co.

t Jameson Smith & Co we work very closely with you throughout the liquidation process and afterwards if required to help make sure that everything on your side runs smoothly and that you are protected personally as much as is possible. So the liquidator has a duty to the creditors (people your business owes money to) whilst having due care for the  directors and Jameson Smith & Co has a duty to the directors with due-care to the creditors. Who would you rather have on your side? This is not meant as a slight on the liquidator quite the contrary they have a job to do and we find that this brings a far more equitable solution and everyone is tended to and taken care of.

IMPACT OF GOVERNMENT CUT BACKS ON TIME TO PAY ARRANGEMENTS

There has been much talk in the media over public service cut-backs but what is relatively unknown is the additional pressure to HMRC over recent years due to the chaotic implementation of various software systems. These software systems were intended to assist the user but have as usual caused divisions internally as to just how useful they have been considering the huge cost to the public purse. I know from conversations with HMRC staff that the systems have been ‘a bit of a nightmare’ to implement and ‘not user friendly’ enough. You probably won’t be surprised to learn they were designed to be simple to implement and to be extremely user friendly.

To make matters worse HMRC is under increasing pressure to bring in more revenue yet staff numbers are under pressure and the heads of departments expected to deliver cost savings. The Public and Commercial Services Union (PCS) has instigated protests over the cut backs in benefits and proposed job losses resulting in a recent short strike of 55,000 call centre and face to face enquiry centres across the UK. So if you are seeking a time to pay arrangement be aware the voice at the other end of the phone may have their own problems too.

There have always been opposing views on the value of time to pay arrangements (TTP) with those on the supporting side saying the HMRC arrangements keep employees in work. On the opposing side however there are those who insist they are of little value and keep zombie companies afloat when they should be dead and buried. Whoever is correct the future of time to pay arrangements is in question once again as staffing reductions are very likely to impact on the number of proposals it is possible to monitor.

It is extremely difficult to establish accurately just how many proposals are now declined as HMRC no longer publish the relevant figures ceasing in early 2012. The last accurate figures published by HMRC from 2011 showed and sharp increase in the number of proposals declined in the twelve months from 2010-2011 from 2.7% (2010) to 9.3% and I suspect based on personal experience this number has increased even more sharply. Undoubtedly whatever your politics the change of government has made a huge difference to the change of stance of HMRC. They are under increasing pressure to bring in more revenues from this government and with less staff.

So what is the likelihood of getting a time to pay arrangement agreed with HMRC in the current environment?

Frankly the vast majority of TTP arrangements are doomed before they start as there is usually little thought put into them by either party. The company director often under pressure agrees to almost anything to get rid of the HMRC pressure and the HMRC are juggling a lot of cases. HMRC in their defence have an almost impossible job as they are being asked to do more for less and are working in difficult circumstances so they are also likely to be demotivated.

In order to agree a time to pay arrangement you need to have motivated people to monitor them and the terms agreed. All of this effort takes time and staff. I believe this area will and is having a definite impact on the likelihood of getting a time to pay arrangement agreed with HMRC.  It is difficult but I would put the chances of acceptance at around 30-40% at best based on personal experience over the last twelve months. I can’t prove this of course as I mentioned earlier the figures are not published now but if the number of proposals turned down is anywhere near this figure then there would have been huge increase in the number of TTP arrangements declined.

So what happens if your time to pay arrangement fails? At the moment they (HMRC) are particularly aggressive when pursuing failed agreements and will inevitably wind the ‘culprit’ company up almost immediately and certainly within days unless there are exceptional circumstances. A key element in failing time to pay arrangements is when due taxes are very often overlooked and not paid – this triggers a default and the subsequent lack of confidence by HMRC.        

One thing for sure is that with banks unwilling to lend despite all the political and banking rhetoric and HMRC getting tougher it can only be bad news for SMEs.

Written By Mike Smith

Is Your Focus Killing Your Business???

Focus... A small word with huge potential.

You may have heard of the old saying that 'you are what you eat'; well this concept can be applied to all walks of life and more specifically today, we want to cover this concept very briefly when related to business.

So moving away from the idea of food for a moment, what we are talking about here is where you place your focus and how that can affect the results in your business and in your life. Here's a good example; your sat at home watching the TV and the news comes on. Most people watch the news, yet few think about how the content of what is projected from this little box in your front room affects your mood and consequently, your actions from that point. Most of the information that is provided on the news is likely to not be very positive or happy as the press don't believe that it makes a good story and whilst watching one news broadcast is unlikely to have a lasting affect on your subconscious you may start to be convinced of certain beliefs about the world around you, due to the content of the information that you are absorbing.

... and it's not just the TV...

What we absorb in our daily routines and through our habits can and often does determine the type of lifestyle that we live.

What sort of people do you surround yourself with on a daily basis? What sort of books, or magazines do you read? Positive? Negative? Supportive? Destructive? Motivational? Limiting???

All these things should be taken into account in order to work towards becoming a more balanced business owner or employee.

Slowly, but surely you may have been engaging in negative or self-limiting actions due to the type of people, or information that you choose to surround yourself with every day. If you look for the negative in the world, guess what you will find. Likewise, if you always look for the positive, you will find that, also.

All this can be wrapped up in a very simple, slightly amended, adage which is 'We are what we absorb'; in every sense of the word, so take the time to focus your attentions into more constructive, positive and ultimately successful areas of your life and your business, because they are there; you just need to focus on them for long enough and new habits and in turn, new results will be formed.

When people are met with challenges in business they often seek to blame the environment for the outcome and this is normal behaviour for us humans. In some cases a lack of focus can lead to serious situations such as bankruptcy or a winding up petition from a creditor against your business which leaves you with few options. Prevention is the best remedy and where you decide to put your focus can make the difference between success and failure... so think about what you focus on - on a daily basis.

Here's to your health in all forms and success in business whether you are a Director of a Limited Company, or you are employed by someone else's business.

Small success leads to large success...

By Tony Smith