Synopsis

A three year old company that had never made a profit was suffering severe cash flow difficulties.  The business was in arrears with HMRC for Corporation Tax, VAT and PAYE, as well as being substantially behind with payments to its trade suppliers.  As a result this niche medical distributor was in imminent danger of failing

There is only now

We have seen many companies in this position over the years. Circumstances arise where a product’s market availability is restricted because of regulatory issues and slow customer take up in areas where it can be introduced on a limited basis. However, time waits for no man and it takes cash to run a business. Slowly the cash gets eaten away, with little revenue to show for it. Most frustratingly, it is quite often the case where the light at the end of the tunnel can finally be seen, but the cash and resources to reach it have dwindled and the light fades. 

Realising this early on is crucial. That’s easy to say, but there again, this is not an uncommon scenario. Acting early to ensure that the stakeholders such as trade creditors are appraised of the situation and regularly updated, helps to slow or stop the erosion of stakeholder confidence in the business and its management team.

Often, as we have experienced, good cashflow forecasting and contingency planning allow decision makers the confidence to act in the NOW, rather than wait for an inevitable crunch.

Begin with the end in mind

Our assessment was that the business had potential and could be saved, providing support could be obtained from the stakeholders in the business. The end game was therefore to rescue the business and end up with a fiscally sound and restructured business.

Our first steps were to gain some time with both HMRC and the trade creditors.  We explained that the Managing Director who was also the majority shareholder, had appointed us to assist him with 'turning around' the business.  As a result of our appointment, HMRC and the trade creditors could see that the difficult situation was being taken extremely seriously by the company.  We asked for and were granted time to review the business before reverting back to them with our proposals for moving forwards.

Realise, rationalise and readjust

Our review of the business was completed in under 2 weeks and we felt that with the total commitment of the MD and his team, there was a possibility of the company trading its way out of its financial difficulties. However there was a clear risk of the company trading illegally as it was technically insolvent.  Accordingly the MD was made aware of these risks as well as how he might mitigate them.  

We then prepared a plan for dealing with the HMRC and trade suppliers' arrears and got the agreement of the MD to proceed with presenting our proposals.  The priority was then to get HMRC's approval.  Our proposals were challenged robustly, and we explained why any changes might make the difference between success and failure.  We also explained that we had to build in a contingency factor as we were determined to meet our plans even if things didn't work out as planned - it could be potentially disastrous if the company was not able to meet the new payment plan.  Eventually we got HMRC's agreement to our proposals for both the arrears and future ongoing payments.  Once this was achieved we approached the key trade suppliers with proposals for how to deal with future orders as well as paying off the historic debt. These agreements were reached due in no small part due to the reputation of our client, which largely remained intact despite some broken promises.

We believe the key factors for successfully reaching agreement with both HMRC and the trade creditors were being open about the current difficult position, an honest acceptance of mistakes the company had made historically, as well as a clear understanding of what the other parties required going forwards.  Once these building blocks were in place, it only remained for a negotiation to take place, at which each party was willing to compromise.

Outcome

Fortunately the company survived even though things didn't always proceed as planned and hoped.  We made sure all parties knew how matters were progressing and always tried to give them advance notice of any future problems.  Over the ensuing months it was clear that trust was rebuilt with HMRC and their suppliers.

The company now has a turnover 5 times what it was when we got involved.  The MD wanted us to stay on as their adviser, and we are still currently a trusted adviser to the business - some 7 years after being appointed.