SMEs must wake up and smell the coffee of impending financial distress

Unfortunately, entrepreneurs are natural optimists driven on by a dogged determination to grow their firms. They have a “can succeed” attitude, which makes heeding these signals of financial distress almost a psychological impossibility. Case studies abound of them battling on in an almost pathological state of denial, with an abhorrence of calling for specialist help either because it would be to admit failure, or because of the potential cost.

In some cases, this impasse is usually broken by an outsider’s actions, maybe when a supplier pulls its credit line or perhaps if a lender starts asking difficult questions. Sadly, most businesses that fail are SMEs, which usually react badly to these interventions, or lack the sort of mentor or non-executive to raise the alarm and insist that action is taken.

The consequences of delay when a business is faltering have been thrown into stark relief by new research carried out by Opus Restructuring using the analytical model of financial health monitoring specialists Company Watch. This revealed that over two-thirds of business rescues, which have been attempted in England and Wales during the last five years using the premier workout procedure of administration, have failed. The companies concerned have ended being liquidated or dissolved without a going concern sale of the business and without any jobs being saved.

The research, which can be found here, through the Company Watch database found a total of 4,581 administrations had been filed in the last five years. Some 43 per cent (1,974) are still in progress and the eventual outcome of each one is unknown at this time. But out of 2,607 administrations which have been completed, only ten per cent (263) companies exited the process and are still active – and most of these were asset-rich hotel and property businesses. In another 20 per cent (some 500) of the cases, the business may have been saved through a sale, either on a pre-pack basis or after a period of trading by the administrators.

As if such a low success rate of 30 per cent wasn’t bad enough, even when a rescue out of financial distress is achieved unsecured creditors ended up with a nominal recovery of around seven pence in the pound on average. In over 50 per cent of the rescues, unsecured creditors received no payment at all.

These statistics are a reminder of just how difficult business rescue can be. Whilst restructuring and insolvency experts are realists and know that not every business can be saved, they constantly complain about how far down the financial distress curve these firms are before they are called in. Calling in air cover when the creditor enemies are already behind your lines doesn’t leave a lot of scope for a commercial or financial victory.

[rb_inline_related] The Opus & Company Watch research should prompt suppliers to get involved and to try to be supportive as soon as they pick up problems. Otherwise the outcome will a bad debt and a lost revenue stream. Those who run troubled businesses must get specialist help early, while there is still something to save.

After over twenty years’ experience of trying to save businesses, it’s clear that every month of extra rescue time is vital. It would be good to think that with concerted early action, the success rate for rescues might rise to 50 per cent or maybe even more.

Nick Hood is a chartered accountant and Business Risk Adviser at Opus Restructuring

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