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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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