Avoiding bear traps in credit crunch (From Lancashire Telegraph)

Avoiding bear traps in credit crunch

1:18pm Monday 15th December 2008

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In a downturn, many companies often only discover they are in trouble when they run short of money and their bank is reluctant to extend their borrowing.

But there is much that can be done before a company reaches this stage, to mitigate future difficulty.

Many companies have been caught up in what has turned into the worst financial disaster to hit the UK economy since the early 1990s.

Confidence has haemorrhaged from the financial sector, and many banks have become reluctant to lend money to struggling businesses.

Sales have dropped dramatically in many sectors and, combined with the impact of rising energy and other costs, profit margins have been squeezed.

A common theme among businesses which are in financial difficulty is the lack of reliable and timely management information.

Business owners often prioritise quite differently to their professional advisors and when the going gets tough they get out there selling, networking, fire fighting and praying that all will be well.

However, all of this energy can be in vain where they have no up-to-date management information with which to monitor and control the business.

There are a great many bear traps out there, including suppliers shortening payment days, creditors failing to pay or taking longer and longer to settle debts, or even worse, going under owing substantial amounts combined with reduced sales, and rises in basic supplies such as fuel (we are after all in the winter quarter).

It is at this stage that professional help is most crucial.

Seeking input from advisors at an early stage can often help to overcome the issues and get the business back on track.

This may involve an informal arrangement with creditors where extended credit is required in order to see the company through cash flow difficulties or the use of the formal protection of a Company Voluntary Arrangement in cases where creditor pressure is intense.

In troubled economic times, it is vital that owner-managers keep cash flowing into their businesses.

They should invoice promptly and regularly and negotiate for regular payments across the life of any long-term contracts.

Our top tips include avoiding overtrading: don't continue to accept orders and try to fulfil them if you don't have enough cash or resources to do so.

Recover debts: chase up any debts owed to you; renegotiate your credit limits, adjust payment dates and credit limits with your main suppliers; approach your bank to discuss extending the available finance; consider factoring, or selling outstanding invoices to a third party.

Finally, do not ignore creditors. Any creditor, or group of creditors, owed more than £750 can ask a court to wind up your business.

It is important to answer their letters and calls.

• For further information, contact Simon Baxendale on 01254 688100 / s.baxendale@pierce.co.uk