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Published on 2 December 2010 by Tony Groom

Directors Could be Storing Up Trouble for Later by Sacrificing Their Pay and Drawings Now

In economic crises company directors are tempted to cut their drawings and forego

their salaries in order to save their companies.

Many of them hope that the market will recover and as a result retain costs that their

companies cannot afford by sacrificing their personal drawings on the company

today.

But for how long can, or should, directors sacrifice their income and dividends in

order to retain the company’s capacity for growth in the hope the order book fills

up?

The example of a construction company that had declined from a turnover of £5

million down to £2 million, with overheads that required a turnover of at least £3.5

million illustrates the questions that need to be asked.

This particular company called in a rescue adviser when it the was losing something

in the order of £60,000 a month. Its directors’ dilemma was how long they could go

on losing that kind of money.

It may have been sensible for them to hold on and forego drawings and salary while

they hoped that sales would increase, however it soon became apparent that

orders would remain low for some time. The situation was not helped by the fact that

in spite of sacrificing their salary, the losses ate into the balance sheet and within six

months the company was insolvent with negative equity and late payments. With

the company in negative equity its losses were then being borne by creditors rather

than the shareholders.

K2 Business Rescue The Emergency Service for Business

Call Tony Groom on 0844 8040 540

Once a company’s creditors are affected by a worsening balance sheet then there

is a risk that the directors could be held personally liable for the increasing debt if

they do not take decisive action to get the situation under control, for example by

consulting a business turnaround adviser.

In any event no company can continue in a situation of insolvency for long in the

hope of an upturn in the market without taking some measures to try to move it back

to profitability.

At the time of writing (November 2010) it is estimated that there are more than

370,000 Time to Pay arrangements between businesses and HM Revenue and

Customs (HMRC). Such a huge number suggests that a lot of directors have

sacrificed their drawings in order to prop up their company to keep it going in the

short-term by deferring payments rather than restructuring the business for long term

survival. This highlights the need for a lot of companies to change their business

model and significantly cut their costs.

Doing so would benefit a company’s directors, who could then start to pay

themselves once the company resumed profitability.

It may be easy in such circumstances to cut your drawings, pension contributions or

health insurance but this can only ever be a short term measure. As directors begin

to discover that the short term measures are becoming longer term this will have an

impact on their personal lives. Indeed some directors are already having to put

some of their own money into companies, either by remortgaging their homes or

taking money out of their pensions to prop them up as market conditions remain

difficult. Often this is yet another short-term measure that does not restructure the

business to remove costs.

Without a proper review of the company or the ability to make profits they may be

prejudicing their personal futures.

This is all indicative of a failure to bite the bullet and restructure in the hope that the

market will pick up. But it is also a failure to take advantage of an opportunity. It is a

very rare company that does not need to review its business model from time to

time, and it may also be that there is a viable core business buried under the current

problems that an objective but supportive turnaround adviser may be able to

identify and help the directors to nurture.

We are not Insolvency Practitioners. We operate within the law to protect our clients and their wealth. Our team has worked for over 20 years to help stabilise and return hundreds of businesses to profitable growth. Once appointed, Insolvency Practitioners do not work for you, they work for creditors and use your company’s assets to pay themselves. We work for you, not creditors.

K2 Business Rescue The Emergency Service for Business

Call Tony Groom on 0844 8040 540

More Free Resources for Directors and Business Owners in Difficulty www.rescue.co.uk

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Need Immediate Help – Call Tony Groom on 0844 8040 540