Making Sure Insolvency Remains a Last Resort
No business is safe in uncertain times. With disruption set to continue through the year's end, even multinational companies must make preparations to avoid insolvency.
Andrew Taylor, partner and head of restructuring at law firm Shakespeare Martineau, outlines the steps large corporations can take to remain stable through the COVID-19 pandemic and future crises.
Over recent months, COVID-19 has sent shockwaves through the economy. Virtually no companies have emerged from this summer unscathed, with even long-established businesses, such as Pizza Hut, Debenhams, and New Look experiencing challenges. To keep afloat, many large organisations have had to employ a wide range of restructuring tools to avoid formal insolvency.
Looking under a company’s hood and understanding its inner workings, especially on the balance sheet, should be the first port of call for directors and their advisors. Reviewing cash flow and expenditure is a critical first step. From keeping an eye on rogue costs (such as locked stock, unused services, and neglected facilities) to understanding areas that can be adapted to the changing economic landscape; these are all steps a prudent director should be taking in these challenging times.
A thorough cash flow review can help struggling companies understand if additional measures need to be put in place to help them. This support can take different forms, from holding talks with stakeholders about possible cash injections, to agreeing to new terms with suppliers, lenders, and clients. Pizza Hut’s recent CVA is a good example of a large organisation seeking pre-emptive recovery measures and highlights the need to adapt to changing trading circumstances. With operations across the UK, the fast food chain had many outlets with differing rent agreements. By engaging with its landlords, it was able to put a plan in place to protect the majority of its retail outlets.
A thorough cash flow review can help struggling companies understand if additional measures need to be put in place to help them.
Looking beyond the inner workings of the business is also important and this includes communicating openly with stakeholders and letting them know of any changes that need to happen. Whether that’s working with them to seek additional support from the government, such as the approach taken by airline operators, or seeking support from professional advisors.
During difficult times, many businesses may want to extend their payment terms with creditors while reducing the terms with their debtors. Ultimately, in turbulent times, companies need to keep lines of communication with suppliers and debtors open as, in the current climate, some may risk collapse and need added support. Ultimately, having a flexible payment partner is better than having none at all.
Essential steps to boost finances and keep the business away from the brink of insolvency may be needed; for example, realigning services, clients, or products. With the onset of the pandemic, many companies saw reduced interest in certain products and goods. However, often, when one door closes another one opens. A good example of this was the approach taken by pubs during the peak of lockdown. In a bid to stay profitable, many chose to pivot and offer takeaway. It’s important to identify new opportunities and to stay flexible in the face of uncertainty.
In times of high financial stress, restructuring professionals are great assets to have on board. Working with a strong team of advisers will help directors understand the business’s financial position and set out a roadmap to recovery, making the most of all turnaround and restructuring methods available. From guiding through negotiations and highlighting pressure points in the business, to assisting with high profile decisions, gaining third party advice is invaluable.
The pandemic has forced many businesses to reevaluate their priorities and think outside the box. As the economy adapts to new consumer behaviour, directors need to stay flexible and have an ear to the ground to spot any early signs of trouble. There will be winners and losers in this economic climate, and it is those that act quickly and decisively that will most likely come out the other side of this crisis with a viable business.