Guiding your clients through a financial crisis. The essential business rescue guide for accountants.
Business owners up and down the land are asking themselves the same question: can my business survive in a post-Covid world?
For some, unfortunately, the answer will be no – at least not in its current form. Businesses that built substantial reserves before the pandemic struck, or have been trading during the pandemic, may find it easier but all businesses should be able to adapt and thrive going forward.
However, a great many will be in the precarious position of having good long-term prospects but dismal short-term ones. The good news is that help is out there. By marrying expert advice with your experience and know-how and some careful planning, you can navigate the storm and sail your clients to calmer waters.
This article explains the specific problems you may encounter working alongside your clients and outlines the solutions to those problems. Some aspects we discuss will be more familiar to you than others depending on your background and experience.
The post-Covid landscape
For accountants, the world is changing. Adjusting to a post-pandemic landscape is just a part of that change. There are many challenges ahead for the sector.
Compliance changes such as the full implementation of Making Tax Digital (MTD), which will radically change the typical accountant’s working life.
Speed of tax changes in the coming year(s): think IR35, the Domestic Reverse Charge for VAT, the aforementioned MTD – not to mention Brexit…
An increased regulatory burden including the anti-money laundering regs and new HMRC initiatives.
The increasing speed of innovation in the accountancy sector, notably around technology and the vast range of products on offer.
Staff and HR issues including flexible working and managing remote employees; office safety for returning workers (social distancing, hygiene), managing visits to clients’ premises, and (possibly) issues around staff cuts/redundancies.
As well as dealing with all of the above, many accountants will also be contending with a loss of fees from clients no longer in business and downward pressure on fees from others struggling to cope. However, for many this has been offset with new income streams: those specifically relating to Covid-19 Government support, and greater engagement with clients on more general business matters such as guiding clients through a financial crisis.
And there’s the day job to do! That perpetual juggling act of compliance and advisory that all accountants in practice know only too well.
But while you may be busy fighting fires, it’s crucial that you keep a sense of perspective. Remember, the key to moving ahead while protecting both your firm and your clients’ businesses is keeping the channels of communications open.
Preparing for the future
This is a vital time for you to take stock of the financial health of the companies you work for. It’s never been more important for you to communicate clearly, regularly and with honesty. This dialogue is crucial if your clients are going to survive.
Work with them to assess their situation. Seek expert help when the situation demands it – keep inside your ‘comfort zone’ when dispensing advice. For example, if a client is potentially facing insolvency then it’s crucial you work with a licensed Insolvency Practitioner (IP), getting them involved at the earliest possible stage
It may be that a seemingly hopeless situation can be turned around with prompt, decisive action. One thing is for sure: delaying will not help.
Here are some of the things you can do to help your clients’ companies thrive going forward.
- Revise their value proposition – why should their customers buy (or continue to buy) their products/services? It may be that their ‘sales pitch’ is outdated.
- Scrutinise their finances, looking for cost reductions and driving operational efficiencies.
- Revisit forecasts made before the pandemic.
- Analyse how their markets and client needs have changed. Have they adapted to these changes? Diversification and innovation in products and services is important here.
- Adopt a ‘recovery and growth’ mindset, while adapting their business strategy to address challenges, focus on the new opportunities.
Spotting the early signs of insolvency
When you meet with your clients you should initiate a complete and thorough review of the business’ accounts. Do this with them so you can ask questions when they arise. This will also help you get a better understanding of their business and what their motives and goals are.
Consider cash-flow forecasts, the order book and the company’s bank balance especially carefully, taking into account any ‘hidden’ liabilities (for example credit card debt, deferred payment plans, personal loans, etc.).
At this point you might start spotting the early signs of insolvency. These include:
- Poor sales and an empty (or depleted) order book, or loss of contracts.
- Heavy borrowing (especially if credit/overdraft limits are reached). Refusal of credit from a bank or other lender is a red flag.
- New lines of credit being sought.
- Extended terms sought from creditors.
- Late payment of suppliers or the refusal of suppliers to supply goods.
- Late or non payment of staff wages.
- High turnover of staff.
- Pay cuts or pay freezes for company directors.
- Non payment of cash owed to HMRC for income tax, Corporation tax, VAT, etc..
- Delays in providing financial information
Where you uncover these problems it’s important you analyse them so you can get to the root causes. These problems are bound to get worse over time if you don’t put steps in place to deal with them.
(Now might also be a good time to remind them that it’s an offence to trade while insolvent and of their legal obligations to their creditors.)
Informal insolvency options
For most businesses in trouble, an informal insolvency will be the best option. Although there are some pitfalls, which we will explain here.
An informal insolvency is unlikely where the debt is a large one or where there are multiple creditors. However, if the debt is to one or two creditors, especially if there’s a good relationship between the parties, then this type of arrangement is worth pursuing.
For the creditor, an informal arrangement will usually be preferable to a formal one. They will have a better chance of getting more of their money back, and they will avoid any legal fees that might arise from pursuing a more formal process. And if the creditor company is a supplier, they might have an eye on doing future business with the indebted firm (albeit with revised terms and conditions).
The first step is to contact the creditor directly to explain the situation your client company is in and to request a discussion on setting in motion the informal process.
Once they agree to this it will be your job, as the distressed firm’s accountant, to help them put forward a credible case to the creditors. This means having to prove that any plan to repay the debt is realistic and achievable. With your expertise, and the help of business rescue specialists, you’re ideally placed to help your client devise this plan, which will prove the longer-term viability of their business.
One problem with informal agreements is their informality. The lack of a legally binding contract means that at any time the creditor can back out of the agreement and pursue legal action against your client’s company, leaving them completely unprotected. It’s vital that all steps and decisions are properly recorded so that the business owners and the advisors are not exposed to litigation if the informal arrangement doesn’t go to plan.
How can a business be rescued?
If an informal insolvency arrangement cannot be agreed, then there are formal ones that will rescue the business, allowing it to clear its debts and start afresh.
Company administration. A legal process that protects the indebted firm from further action from its creditors. Entering administration gives a company the breathing space it needs so it can plan for survival. It can also prevent one creditor taking action to the detriment to other creditors or the future existence of the company.
Administration is also an opportunity for the company to be restructured, removing inefficient or non-profitable parts of the business.
A CVA. A legally binding agreement between you and your creditors. They will respond to your action plan by voting, at a creditors’ meeting, on whether to accept it. If it’s accepted you will, working with a licensed Insolvency Practitioner (IP), implement the action plan by setting up a schedule of monthly repayments. This schedule will determine how much each creditor is paid each month and how long the CVA will last (usually three or five years).
Pre-pack administration. An insolvency procedure where a company enters into an agreement to sell its assets to a buyer, before appointing administrators to help with the sale. It’s usually seen as the best option if there is a good core business and is a good way to sell the business onto a competitor or third party. Another ‘popular’ alternative is to sell the company back to the existing directors, operating under a new company name, normally called a ‘newco’.
Each of these options needs the involvement of a licensed Insolvency Practitioner. It can be difficult to tell between unregulated, unqualified advisers and reputable, legitimate firms. Many ‘advisers’ have slick websites and clever advertising that make them appear to be legitimate and trustworthy. As someone with genuine experience in the sector, you can steer them away from such companies towards the real experts.
How do financial difficulties affect a client personally? Informal insolvency options
Debt isn’t just a financial problem. It can cause huge emotional damage to a person’s wellbeing, creating anxiety and stress. And a prolonged period of stress can cause physical as well as mental ill-health.
It can also damage personal relationships when it becomes impossible to ‘leave work at the office’. While you’re an accountant and not a counsellor, you are well-placed to offer friendly advice, steering your clients to places where they can get help.
Mental health charities such as MIND have a wealth of information on dealing with debt and managing stress on their websites. And MoneySavingExpert.com has published a free downloadable guide called ‘Mental Health and Debt’. The guide explains that “people do not become depressed overnight. It takes time, usually weeks or months. If you can spot them, the stages below are the time when you can act to avoid full depression.
Another way you can help ease the pressure is to make sure your client stays on the right side of the law. Directors of a company in an insolvency process must follow the rules – this cannot be overstated.
For example, one of the jobs of an administrator is to examine and report on the actions of all directors of the company. Any improper conduct can result in disqualification as a director or having to repay monies to the company which have been handled improperly.
In egregious circumstances, directors can be fined or even sent to prison. Among the no-nos are:
- Hiding assets from the administrator.
- Favouring one creditor over another.
- Paying directors salaries that the company can’t afford.
- Failing to cooperate with requests for financial statements.
- Knowingly trading while insolvent – which could have very serious repercussions for them although there was some protection from this misdemeanor during Covid-19.
If your client has decided the best course of action is to close their business, then the simplest way of formally closing down a solvent company is through a Members Voluntary Liquidation (MVL). This route is not open to companies in financial distress that are unable to pay their debts.
MVLs are a cost-effective and tax efficient way of closing a business, as shareholders can extract profit if the company has retained profits of over £25,000.
If your client goes down this route they’ll need the services of a licensed Insolvency Practitioner (IP). Obviously an IP will charge a fee, and there will be other legal costs (or disbursements). On top of that, your client will also be required to pay a bond, which protects you while your company’s funds are in the hands of the insolvency practitioner (the amount of this bond depends on the value of the company).
You will no doubt be familiar with the principal that when your client’s company closes all retained profits are treated as capital rather than income, meaning Capital Gains Tax is payable, not income tax. This could represent a considerable saving, especially where big profits have been retained.
You can help expedite the MVL process for your client with some preparation. For example you should make sure:
- they have no outstanding bills to pay, especially to HMRC;
- they collect any outstanding monies owed to your them;
- their accounts (and any other relevant paperwork) are up-to-date and correctly filed;
- they de-register for VAT;
- they follow the correct procedures for the termination of staff contracts, etc.
Working alongside an IP, you can make sure the MVL is as painless and cost-effective as it can be for your client.
In order to protect companies threatened with insolvency by the impact of the pandemic, the government introduced the Corporate Insolvency and Governance Act 2020 (CIGA).Some of the measures were permanent, others temporary. Originally, the temporary ones were due to expire on 30 April 2021, but earlier this year the government extended some of measures to run until 30 June, others to 30 September 2021.
The measures being extended include:
- Statutory demands and winding-up petitions will continue to be restricted to protect companies from creditor enforcement action due to debts related to coronavirus.
- Larger suppliers will not be able to cease their supply or ask for additional payments while a company is going through a rescue process.
This gives you more time to work with your clients that are in financial difficulties – to help them survive and then thrive in some of the most difficult economic times the UK has ever experienced.
Don’t wait to seek the advice of the experts. Help is out there. A licensed insolvency practitioner and business rescue professional could help you understand your client’s options in more details – and give them advice directly.