We have recently seen an increase in the number of opportunities where a Company Voluntary Arrangement (CVA) is a better option for a business rather than administration or facing an insolvent liquidation.
When we are approached by a director whose company is experiencing financial difficulties, we will always explore the various option open to the company. Sometimes, these options may be very limited due to the circumstances faced by the company but when there is a viable business which is suffering cash flow problems, a CVA could be the perfect answer.
What is a CVA (Company Voluntary Arrangement)?
A CVA is an agreement between a company and its creditors to renegotiate the terms of its debts. It will more than likely include rescheduling payment terms and compromising (reducing) the amount payable to creditors. The majority of CVA’s are based on monthly contributions being paid by the company into the arrangement from surplus income for a period of between 3 to 5 years.
I am often asked how much the company will need to contribute on a monthly basis. The answer to this is quite simple as it is dependent on the amount of surplus income. In order to establish how much the company can afford, it is important to prepare accurate cash flow forecasts. Once these have been produced, it will also give the director(s) an opportunity to review the company’s income and expenditure and to drill down on the figures.
My advice to directors is to undertake a review the company’s expenditure in order to ascertain whether any cost savings can be made. Once this exercise has been completed, it is important that the company does not commit to a monthly contribution which is unrealistic as the arrangement will fail. With our expertise, we are able to offer advice as to the amount that we think is affordable and which will be acceptable to creditors.
What are the benefits of a CVA?
- It allows a company to pay a percentage of its debts to creditors over a manageable period of time.
- Each CVA is tailored to fit how much the company can realistically afford to pay.
- It provides creditors with a better return than if the company were to enter administration or liquidation.
- It allows a company to continue to trade with very little effect on the day to day running of the business.
- The directors remain in control of the company.
- The directors are able to concentrate on running the company and return it to profitability rather than dealing with creditors who are demanding payment.
- The core business will probably remain unchanged but it is an opportunity to restructure the business with a view to achieving future profits.
- The company continues to trade with its trade suppliers, although they may make a request for pro-forma or cash on delivery payments for an initial period once the CVA has been approved.
- It allows a company to terminate employee or onerous contracts, thereby reducing the burden on the company’s cash flow.
If your company is suffering cash flow problems, take expert advice from us as soon as possible.