How to Improve Cash Flow Where You Have Company Debt Troubles
http://greatsmallbusinessideas.com/articles/31799/1/How-to-Improve-Cash-Flow-Where-You-Have-Company-Debt-Troubles/Page1.html
Derek Cooper
Derek is Managing Director of Cooper Matthews Limited, and a member of the Turnaround Management Association UK Cooper Matthews specialise in Business Recovery Services Advice offering provide straight forward insolvency advice for businesses with financial problems. They have significant experience in working with small to medium sized businesses. More information... By Derek Cooper
Published on 23/04/2010
There is an old saying "revenue is vanity, profit is sanity and cash is king" When businesses are fighting for their survival during and after a recession this proverb is very true
There is an old saying "revenue is vanity, profit is sanity and cash is king". When businesses are fighting for their survival during and after a recession this proverb is very true.
While the statistics may be showing an upturn in economic growth, the reality on the street for many businesses is that times are tough. Depressed sales prices, extended payment terms and bad debts. A full order book is no help if you run out of cash.
In the absence of enough cash your business will fail. If your access to additional investment is limited, alternative options to save your business must be sought quickly.
Raising cash by refinancing or borrowing is often impossible
The most obvious way to increase the availability of cash in a business is to consider borrowing or refinancing.
Asset refinancing schemes are available. However, these only apply if the business owns valuable assets which can be put up as security against a loan.
In the face of these problems, companies need to consider alternative methods to preserve the cash they have.
Restructuring debts to release cash
A radical restructuring of the company debt to preserve cash and reduce monthly outgoings may be required if the company is at risk of failure. There are two main options to consider.
1. Company Voluntary Arrangement or CVA
A Company Voluntary Arrangement enables the company to reduce monthly debt payments ensuring cash is freed up to allow the ongoing trading of the business. The arrangement usually results in debt being written off allowing the company to trade into the future.
2. Pre Pack Administration or phoenixing
A Pre Pack Administration allows a new company to purchase the assets of the old and start to trade without the burden of any legacy debt, the old company usually being liquidated. A pre pack can give a company the best chance of survival where debt is pushing it towards failure.
These options raise the question:
Aren't business debt solutions simply passing the problem around?
The argument against solutions such as Company Voluntary Arrangement and Pre Pack Administration is that creditors will suffer as a result of their debts not being paid.
While it is true that the creditors lose out on at least some of the debt owed, it needs to be considered against the alternative. If the business failed they are likely to lose out substantially more as an unsecured creditor against a failed business. Staff would lose their jobs and there would be no opportunity for ongoing trade with the revitalised business.
A CVA or pre pack administration at least offers some return and the opportunity for the business to remain trading.
Ensuring that enough cash is available to maintain their business is likely to be the number one priority for many companies in 2010 and 2011. Those that do it well will survive - unfortunately those that do not are likely to fall.
As such identifying problems and implement solutions which may require a radical restructuring of debt must be a priority.
While the statistics may be showing an upturn in economic growth, the reality on the street for many businesses is that times are tough. Depressed sales prices, extended payment terms and bad debts. A full order book is no help if you run out of cash.
In the absence of enough cash your business will fail. If your access to additional investment is limited, alternative options to save your business must be sought quickly.
Raising cash by refinancing or borrowing is often impossible
The most obvious way to increase the availability of cash in a business is to consider borrowing or refinancing.
Asset refinancing schemes are available. However, these only apply if the business owns valuable assets which can be put up as security against a loan.
In the face of these problems, companies need to consider alternative methods to preserve the cash they have.
Restructuring debts to release cash
A radical restructuring of the company debt to preserve cash and reduce monthly outgoings may be required if the company is at risk of failure. There are two main options to consider.
1. Company Voluntary Arrangement or CVA
A Company Voluntary Arrangement enables the company to reduce monthly debt payments ensuring cash is freed up to allow the ongoing trading of the business. The arrangement usually results in debt being written off allowing the company to trade into the future.
2. Pre Pack Administration or phoenixing
A Pre Pack Administration allows a new company to purchase the assets of the old and start to trade without the burden of any legacy debt, the old company usually being liquidated. A pre pack can give a company the best chance of survival where debt is pushing it towards failure.
These options raise the question:
Aren't business debt solutions simply passing the problem around?
The argument against solutions such as Company Voluntary Arrangement and Pre Pack Administration is that creditors will suffer as a result of their debts not being paid.
While it is true that the creditors lose out on at least some of the debt owed, it needs to be considered against the alternative. If the business failed they are likely to lose out substantially more as an unsecured creditor against a failed business. Staff would lose their jobs and there would be no opportunity for ongoing trade with the revitalised business.
A CVA or pre pack administration at least offers some return and the opportunity for the business to remain trading.
Ensuring that enough cash is available to maintain their business is likely to be the number one priority for many companies in 2010 and 2011. Those that do it well will survive - unfortunately those that do not are likely to fall.
As such identifying problems and implement solutions which may require a radical restructuring of debt must be a priority.