For anyone who reads The Telegraph, they would have seen a dramatic picture with the headline “Spike in UK companies suffering 'significant ' financial distress: 'Black clouds' are looming over Britain's economic recovery”. Whilst I appreciate that the headlines need to grab the reader, the measures used to test “financial distress” seemed narrow, the main focus being on whether a company had received a County Court Judgement (CCJ). This could be viewed by some as a positive thing, as companies are now taking their debt management seriously and actually chasing in debts. What was worse for me, was that the entire focus was on the negatives, when financial distress does not have to mean the end. It would also have been helpful if some basic debt advice had been given to those that find themselves facing cash flow problems.
Lower rates of failed companies
Unlike previous recessions, there was a drop in corporate insolvencies this time around. This may seem strange to most, as the opposite would be expected, however, this recession was different. The banks have been very aware of the public perception, and as such have avoided where possible forcing companies into insolvency. With interest rates remaining low, companies have been able to afford to repay their lending at present. HMRC have tried to work with companies where they can to spread debts, through a time to pay. This has all lead to lower rates of failed companies.
Lack of debt collection enforcement
As well as this there has been a tendency to not enforce debt collection. When it comes to spending money on debt collection, some companies are avoiding it. Either they don’t want to spend the money chasing the debts, or they are concerned if they chase too hard their customer will simply close down and they will receive nothing and lose a customer. In reality this is unlikely, but the concern is understandable. As confidence grows in the economy it is likely that debt collection is tightened up and we may see more CCJs being issued.
Facing financial distress - get advice
Whilst the recession is officially over, there are a lot of firms that are still struggling to pay their debts, who are still feeling the effects of the crash and the squeeze in the economy. For those, financial distress could become a reality at some point, especially as debts are chased more rigorously, but this does not mean that these companies will “go to the wall” (another expression used in the article). Once financial distress is recognised, the key to turnaround is to get advice. A lot of directors find themselves in financial distress, but unfortunately bury their head in the sand, this has the effect of making the position worse, interest and charges are added to debts, and they can spiral out of control. Trying to juggle creditors, can take time away from the day to day running, taking focus off the business and cause the troubles already there to escalate.
By taking advice debts can be spread over time and better cash flow management tools can be put in place. Breathing space can be brought, to get back on track, and ensure that financial distress does not end up in financial meltdown.
Although I did have issues with the article, anything that raises these issues is positive, and if it means that as a result a company is saved, it must be a good thing. No one can guarantee that there will not be another recession coming, but by having good debt management tools in place, most should be able to ride out the storm.