Blog: Decline in insolvencies conceals real picture



Matt Henderson

Insolvencies are down in Scotland but all might not be as it seems, argues Matt Henderson, head of restructuring, at Johnston Carmichael

 

Many people see it as good news that the number of Scottish companies going into liquidation or administration has decreased since last year.

According to the latest figures, a total of 223 Scottish companies became insolvent in the final quarter of 2017 compared with 229 during the same period in 2016. It certainly is a welcome sign, but the decline conceals the fact that many companies continue to struggle through the current economic difficulties.

In some sectors of our economy companies have had to take drastic action just to survive the downturn. Laying off staff, pay freezes, reduced working hours and withdrawal from non-core activities often lead to low morale and worry within the workforce. This in turn affects productivity and therefore profitability.

When battling to simply manage cash flow it is extremely difficult for owners and managers to deal with the strategic development of their business, but identifying and tackling long-term issues is more important to their survival than fire-fighting. Such matters could include considering whether to move to more appropriate business premises, or re-assessing the business’s approach to market in the face of changing conditions.

Indeed, most companies succeed or fail due to their management. But many managers will not have experienced the challenges of over trading, for example, as we exit a recession. They will not necessarily have the skillset and that is where restructuring specialists come in. Together with their corporate finance colleagues, restructuring specialists can help to turn around a business thereby avoiding the risk of insolvency.

Family business Cumbernauld-based ScotPanel Display Ltd is one such company. Established in 1999 to provide exhibition displays for trade shows and events, the firm had major cash flow issues and had been issued with a winding up order by HMRC when they contacted Johnston Carmichael for help. After negotiations with HMRC our restructuring team was able to save the company through an administration process which culminated in the business being able to raise funding secured against its property. This allowed creditors to be paid in full and the company returned to the control of its shareholders.

With Johnston Carmichael focusing on the company’s finances, ScotPanel could continue to provide a strong service to its clients throughout the administration process, ensuring it retained its loyal customer base. To safeguard the business against future issues, appropriate accounting processes and controls were put in place.

It’s not the same for every business, of course, but restructuring specialists have the knowledge and experience to help even the most distressed company through tough periods. Other insolvency tools available include the underused CVA (Company Voluntary Arrangement) process. This can provide the breathing space a business needs if it is under severe creditor pressure arising from either a non-recurring issue or where there is scope to restructure, given time, to return to profitability and return money to creditors later.

A lot of hard work has to go into a turnaround assignment.  It can sometimes feel like an impossible task. However, we don’t apply complex models which our clients will not understand.  We look at practical aspects of the business life cycle to see where cash blockages might be and can then drill into the detail of that afterwards.

Businesses can see for themselves some of the steps that can be taken by accessing our free online cash flow consultant tool, which in addition to highlighting cash flow issues also offers practical advice.

With the right recovery plan and armed with reliable management information a business can reduce costs and improve margins, putting managers in a strong position to concentrate on the longer term strategic development of the business.

It is crucial that financial performance is properly measured and monitored throughout the process, and that good lines of communication with all the major stakeholders are in place.  In this way those companies who are now struggling on a day-to-day basis can plan for a much brighter and more profitable future.