Early warning signs that a company is in financial difficulties and options to improve

the situation

3 October 2012

Wilkins Kennedy LLP

Next 20 minutes

• Cash flow• Creditors• Debtors• Management• Outsourcing• PAYE/VAT• Legal actions

Cash Flow

• Overdraft is always at the limit• Returned cheques• Banks refusing to provide a loan• Bank has asked for facilities to be reduced• Bank wants to introduce investigating accountants• Bank asks for increased security• Bank wants personal guarantees• Bank is looking for breach of covenants• Invoice discounting/factoring• Refinance assets• Stock financing• Equity or debt for equity

Company Company Company CompanyA B C D

Fixed assetsProperty 1,000,000 1,000,000 Plant & equipment 50,000 10,000 10,000 10,000 Motor vehicles 30,000 15,000 15,000 15,000

80,000 25,000 1,025,000 1,025,000

Current assetsStock & WIP 40,000 10,000 40,000 100,000 Debtors 85,000 10,000 50,000 300,000 Cash at bank 10,000 90,000 25,000 100,000

135,000 110,000 115,000 500,000

Current liablilitiesTrade creditors/HMRCE 105,000 25,000 50,000 1,300,000 Taxation 20,000 20,000 20,000 20,000 Directors loans 180,000 115,000 Bank overdraft

125,000 45,000 250,000 1,435,000

Creditors due after 1 year 800,000

Net assets 90,000 90,000 90,000 90,000

Share capital 10,000 10,000 10,000 10,000 Retained profits 80,000 80,000 80,000 80,000

90,000 90,000 90,000 90,000

Balance Sheets

Cash Flow - 1

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec TotalDr Cr Dr Cr

Sales invoices net 100,000 150,000 200,000 100,000 150,000 200,000 100,000 150,000 200,000 100,000 150,000 200,000 1,800,000 Sales 1,800,000VAT 20,000 30,000 40,000 20,000 30,000 40,000 20,000 30,000 40,000 20,000 30,000 40,000 360,000 Purchases 900,000Gross sales invoices 120,000 180,000 240,000 120,000 180,000 240,000 120,000 180,000 240,000 120,000 180,000 240,000 2,160,000

Wages 660,000Cash received 120,000 180,000 240,000 120,000 180,000 240,000 120,000 180,000 240,000 120,000 180,000 1,920,000 Overheads 140,000

Purchase invoices net 50,000 75,000 100,000 50,000 75,000 100,000 50,000 75,000 100,000 50,000 75,000 100,000 900,000VAT 10,000 15,000 20,000 10,000 15,000 20,000 10,000 15,000 20,000 10,000 15,000 20,000 180,000Gross purchase invoices 60,000 90,000 120,000 60,000 90,000 120,000 60,000 90,000 120,000 60,000 90,000 120,000 1,080,000

Debtors 240,000Cash paid 60,000 90,000 120,000 60,000 90,000 120,000 60,000 90,000 120,000 60,000 90,000 960,000 Creditors 120,000

VAT 37,700Gross profit 50,000 75,000 100,000 50,000 75,000 100,000 50,000 75,000 100,000 50,000 75,000 100,000 900,000 Bank account 17,700

1,700,000 1,800,000 257,700 157,700Wages 55,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000 660,000Overheads 11,000 11,500 12,000 11,000 11,500 12,000 11,000 11,500 12,000 11,000 11,500 14,000 140,000 Profit 100,000 100,000VAT on overheads 2,200 2,300 2,400 2,200 2,300 2,400 2,200 2,300 2,400 2,200 2,300 2,800 28,000 1,800,000 1,800,000 257,700 257,700VAT payments 38,100 38,100 38,100 114,300

Net profit (16,000) 8,500 33,000 (16,000) 8,500 33,000 (16,000) 8,500 33,000 (16,000) 8,500 31,000 100,000

Operating profit 100,000Cashflow Increase in debtors (240,000)Opening balance (68,200) (77,000) (56,400) (42,700) (51,500) (30,900) (17,200) (26,000) (5,400) 8,300 (500) 0 Increase in creditors 157,700Cash in 0 120,000 180,000 240,000 120,000 180,000 240,000 120,000 180,000 240,000 120,000 180,000 1,920,000 Net cash inflow 17,700Cash out 68,200 128,800 159,400 226,300 128,800 159,400 226,300 128,800 159,400 226,300 128,800 161,800 1,902,300

Closing balance (68,200) (77,000) (56,400) (42,700) (51,500) (30,900) (17,200) (26,000) (5,400) 8,300 (500) 17,700 17,700

P&L a/c Balance sheet

Cash Flow - 2

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec TotalDr Cr Dr Cr

Sales invoices net 100,000 150,000 200,000 100,000 150,000 200,000 100,000 150,000 200,000 100,000 150,000 200,000 1,800,000 Sales 1,800,000VAT 20,000 30,000 40,000 20,000 30,000 40,000 20,000 30,000 40,000 20,000 30,000 40,000 360,000 Purchases 900,000Gross sales invoices 120,000 180,000 240,000 120,000 180,000 240,000 120,000 180,000 240,000 120,000 180,000 240,000 2,160,000

Wages 660,000Cash received 120,000 180,000 240,000 120,000 180,000 240,000 120,000 180,000 240,000 120,000 1,740,000 Overheads 140,000

Purchase invoices net 50,000 75,000 100,000 50,000 75,000 100,000 50,000 75,000 100,000 50,000 75,000 100,000 900,000VAT 10,000 15,000 20,000 10,000 15,000 20,000 10,000 15,000 20,000 10,000 15,000 20,000 180,000Gross purchase invoices 60,000 90,000 120,000 60,000 90,000 120,000 60,000 90,000 120,000 60,000 90,000 120,000 1,080,000

Debtors 420,000Cash paid 60,000 90,000 120,000 60,000 90,000 120,000 60,000 90,000 120,000 60,000 90,000 960,000 Creditors 120,000

VAT 37,700Gross profit 50,000 75,000 100,000 50,000 75,000 100,000 50,000 75,000 100,000 50,000 75,000 100,000 900,000 Bank account (162,300)

1,700,000 1,800,000 257,700 157,700Wages 55,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000 660,000Overheads 11,000 11,500 12,000 11,000 11,500 12,000 11,000 11,500 12,000 11,000 11,500 14,000 140,000 Profit 100,000 100,000VAT on overheads 2,200 2,300 2,400 2,200 2,300 2,400 2,200 2,300 2,400 2,200 2,300 2,800 28,000 1,800,000 1,800,000 257,700 257,700VAT payments 38,100 38,100 38,100 114,300

Net profit (16,000) 8,500 33,000 (16,000) 8,500 33,000 (16,000) 8,500 33,000 (16,000) 8,500 31,000 100,000

Operating profit 100,000Cashflow Increase in debtors (420,000)Opening balance (68,200) (197,000) (236,400) (282,700) (171,500) (210,900) (257,200) (146,000) (185,400) (231,700) (120,500) 0 Increase in creditors 157,700Cash in 0 0 120,000 180,000 240,000 120,000 180,000 240,000 120,000 180,000 240,000 120,000 1,740,000 Net cash inflow (162,300)Cash out 68,200 128,800 159,400 226,300 128,800 159,400 226,300 128,800 159,400 226,300 128,800 161,800 1,902,300

Closing balance (68,200) (197,000) (236,400) (282,700) (171,500) (210,900) (257,200) (146,000) (185,400) (231,700) (120,500) (162,300) (162,300)

P&L a/c Balance sheet

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec TotalDr Cr Dr Cr

Sales invoices net 100,000 150,000 200,000 100,000 150,000 200,000 100,000 150,000 200,000 100,000 150,000 200,000 1,800,000 Sales 1,800,000VAT 20,000 30,000 40,000 20,000 30,000 40,000 20,000 30,000 40,000 20,000 30,000 40,000 360,000 Purchases 900,000Gross sales invoices 120,000 180,000 240,000 120,000 180,000 240,000 120,000 180,000 240,000 120,000 180,000 240,000 2,160,000

Wages 660,000Cash received 120,000 180,000 240,000 120,000 180,000 240,000 120,000 180,000 240,000 120,000 180,000 240,000 2,160,000 Overheads 140,000

Purchase invoices net 50,000 75,000 100,000 50,000 75,000 100,000 50,000 75,000 100,000 50,000 75,000 100,000 900,000VAT 10,000 15,000 20,000 10,000 15,000 20,000 10,000 15,000 20,000 10,000 15,000 20,000 180,000Gross purchase invoices 60,000 90,000 120,000 60,000 90,000 120,000 60,000 90,000 120,000 60,000 90,000 120,000 1,080,000

Debtors 0Cash paid 60,000 90,000 120,000 60,000 90,000 120,000 60,000 90,000 120,000 60,000 90,000 960,000 Creditors 120,000

VAT 37,700Gross profit 50,000 75,000 100,000 50,000 75,000 100,000 50,000 75,000 100,000 50,000 75,000 100,000 900,000 Bank account 257,700

1,700,000 1,800,000 257,700 157,700Wages 55,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000 660,000Overheads 11,000 11,500 12,000 11,000 11,500 12,000 11,000 11,500 12,000 11,000 11,500 14,000 140,000 Profit 100,000 100,000VAT on overheads 2,200 2,300 2,400 2,200 2,300 2,400 2,200 2,300 2,400 2,200 2,300 2,800 28,000 1,800,000 1,800,000 257,700 257,700VAT payments 38,100 38,100 38,100 114,300

Net profit (16,000) 8,500 33,000 (16,000) 8,500 33,000 (16,000) 8,500 33,000 (16,000) 8,500 31,000 100,000

Operating profit 100,000Cashflow Increase in debtors 0Opening balance 51,800 103,000 183,600 77,300 128,500 209,100 102,800 154,000 234,600 128,300 179,500 0 Increase in creditors 157,700Cash in 120,000 180,000 240,000 120,000 180,000 240,000 120,000 180,000 240,000 120,000 180,000 240,000 2,160,000 Net cash inflow 257,700Cash out 68,200 128,800 159,400 226,300 128,800 159,400 226,300 128,800 159,400 226,300 128,800 161,800 1,902,300

Closing balance 51,800 103,000 183,600 77,300 128,500 209,100 102,800 154,000 234,600 128,300 179,500 257,700 257,700

P&L a/c Balance sheet

Cash Flow - 3

Creditors

• Problems• Cash flow always tight so paying creditors is difficult - constant creditor pressure• Can’t get stock on time because missed deadlines for payment of supplier accounts• Cannot get new credit• Cannot extend existing credit• Company’s creditor days growing• Solutions• Communicate with creditors• Make arrangement with creditors• Consider CVA or administration if necessary• Offer security or debt for equity

Debtors

• Problems• Debtors are taking longer to pay• Businesses invoice too slowly• Debtor days are allowed to increase• High concentration in 1 or 2 debtors making business vulnerable• Debtor collection function too weak• Lots of old debts• Solutions• Factor/invoice discount/outsourcing• Invoice more frequently• Better credit checks on new customers• Credit insurance

Management

• Problems• Don’t have a business plan• Don’t have a cashflow model• Don’t have regular management/board meetings• Are taking big salaries and expenses• Solutions• Bring in interim manager• Part time directors/non-execs• More input from accountants• Business improvement facilitation• Review staffing levels and cost base• Consider a waste audit

Management don’t know

• Problems • Gross Profit - accurately• Costs - accurately• Sales• Bank balances• Where 80% of work comes from• Where 80% of profit comes from• Key statistics of the business• Break even point• Solutions • Install a good management information system• Obtain good staff either internally or outsource

Outsourcing

Benefits

• Save money but not most important reason• Converts fixed costs to variable costs• Reduces initial capital commitment to free capital to spend elsewhere• As a result improves competitive advantage• Hiring and training staff is expensive, holiday pay, sickness pay, managing staff uses

management time• Flexible - grows or shrinks with demand• Focus on core business - all businesses have limited resources• Can enable small firms to act big• Reduces risk - third party responsible for keeping abreast of legislation changes• Scope of resources e.g. VAT, employment legislation• Strategic v operational

PAYE

• Not paying deductions on 19th of the month following• Not filed monthly returns or paid the tax deducted• Have had penalties• Have entered into deals with the Revenue

VAT

• Not filing returns or paying tax on time• Had surcharges• Doing deals over time with the local VAT office

Legal Actions

• County Court Summons – CCS’s• County Court Judgements – CCJ’s• Walking possession• Statutory demand• Winding up petition• What to do

Contact Details

Stephen Grant on 01494 545570 or email stephen.grant@wilkinskennedy.com

Vee Bharakda on 01494 545570 or email vee.bharakda@wilkinskennedy.com

Wilkins Kennedy LLP

Anglo House

Bell Lane Office Village

Bell Lane, Amersham

Bucks, HP6 6FA