There’s no doubt that we are living in extraordinary – perhaps unprecedented – times. Scarcely a week seems to go by without news of another company failure – retail company failures seem to have been particularly in vogue, with Blockbuster Video, HMV, Jessops and Comet all falling into administration in the last few weeks.
Yet very few companies fail overnight. In most cases the warning signs are there to be seen many months, perhaps even years, before the axe falls. Like ships, most sink gradually; very few hit icebergs.
A business on the slippery slope starts by underperforming, making less profit than it ought. That results in less to invest in new products or processes, and slowly, insidiously it starts to fall behind the competition. Its reputation in the market starts to suffer and, before long, it starts incurring losses.
In order to fund those losses it starts to juggle its cash. Very often the bank will want extra security, or personal guarantees from directors, as the account is constantly up against its overdraft limit. It will start extending credit terms with its suppliers, perhaps making round sums on account instead of paying balances in full. Staff morale will start to suffer and the quality of output may deteriorate.
The distress leads to crisis as the business is “on stop” with suppliers. If the company can’t get supplies, then it can’t finish orders, which means it can’t bill its customers, which means it can’t get paid. Suppliers’ solicitors’ letters and legal threats lead to legal action.
And if it can’t get cash to pay the wages or the rent, then it’s all over.
Many insolvencies could have been avoided if only the warning signs had been spotted and insolvency advice and action had been taken, earlier. As insolvency practitioners, we view winding companies up as being a last resort. We always start with the objective of trying to rescue, or turn around, companies in financial difficulties.
However, when the bailiff is knocking on the door, the landlord is threatening to distrain, the winding up petition is due to be heard and the bank won’t pay the wages, it’s usually too late. So the earlier our insolvency advice is sought, the greater the chance of success.
When a fire is just smouldering, it may be difficult to see, but it can be reasonably easy to put out with relatively little damage. Once it becomes a conflagration it which will much more difficult to control and the damage will be considerable. In just the same way, business problems may be hard to spot in their early stages, but if they are dealt with early on they are much easier to address and the consequences will be much less damaging than they might be otherwise.
So don’t be an ostrich – don’t bury your head in the sand. Take insolvency advice as soon as you can.