First steps to recovery
Simply adopting a head-in-the-sand policy when the accounts don't balance is a recipe for disaster. Being aware of the warning signals and taking prompt action could prevent many businesses from falling into financial ruin. Colin Haig reports.
Blame it on the prospect of another recession or the ongoing foot-and-mouth crisis, but the number of businesses going bust is on the increase.
Significantly, the biggest increase of companies falling by the wayside is in the regions hardest hit by the disease. According to a report by business information guru Dun & Bradsteet, business failures in the South-west and North-west regions during the second quarter of this year were well up on the first quarter's figures.
Philip Mellor, senior analyst at D&B, says: "Failures are now starting to climb upwards again. This rise is in part due to the drop in tourism and other adverse factors caused by the foot-and-mouth epidemic."
The British Tourist Authority confirms that it has been more difficult to attract tourists to Britain because of foot-and-mouth, although a spokesperson says that "things are starting to pick up at the moment". The effect has meant a loss of revenue for the hospitality industry totalling £1.5b.
With the threat of a recession just round the corner, hospitality businesses throughout the UK are right to be worried.
Small, privately owned businesses are the most vulnerable as they operate on tight margins and generate the bulk of their turnover from April to October. One month's bad trading is unfortunate, two or three precipitate a crisis, four or more are enough to put many out of business. The hospitality industry has always acted as a barometer for the economy, and now is the time for businesses either experiencing a downturn or trading unprofitably to take action.
Thankfully, few companies become insolvent overnight. Instead, businesses usually slide into insolvency over a period of months, with progressively shrinking income, fixed overheads and dramatically increased pressure from creditors and banks.
To pretend it is not happening will not stop the slide, and there are 12 key early warning signs which businesses should be aware of (see below).
Biggest obstacle
While the Government, banks and insolvency profession prefer to turn a business around rather than terminate it, the first steps must be taken by management.
Fear is the biggest obstacle to corporate rescue - fear of insolvency, fear of failure, fear of public censure, fear of losing one's livelihood, home, and even family. Fear is frequently based on ignorance of a business's real financial situation and of the options available, leading to aversion and denial. Around 90% of insolvencies are due to owners' fear and indecision. Owners and company directors are the only people who can take the first steps towards recovery, but doing so involves conquering that fear, understanding finances and publicly asking for help. The sooner they act, the better their chances of turning the business around.
A company or individual is deemed insolvent if they lack sufficient assets to cover their debts or if they are unable to pay their debts as they fall due. Debts of just £750 are enough for creditors to pounce and for individuals to be declared bankrupt. How many in the hospitality industry can claim they owe less than £750 as a private individual or £1,000 as a corporate entity?
If hoteliers and caterers don't take preventive action they might find themselves facing insolvency proceedings.
Business recovery professionals can rescue troubled companies through a variety of legal and informal procedures, and many offer the first hour of advice free. In tandem with the clearing banks and other organisations they restructure debt, streamline operations and do whatever is necessary to keep a business going while it trades out of trouble, is refinanced or sold to or merged with another firm.
Tough conditions Those experiencing tough trading conditions might want to explore a Company Voluntary Arrangement, or CVA. This is a rescue procedure for businesses introduced by the 1986 Insolvency Act. Although CVAs were untried until the recent recession, this procedure allows a business to continue to trade, provided creditors agree. The ideal outcome is a business that returns to profitability.
Under a CVA a company is reorganised to enable it to pay creditors through mechanisms like delayed or reduced debt payments, capital restructuring or an orderly disposal of non-core assets. A CVA must be agreed by creditors and shareholders at separate meetings. While the courts have limited involvement in a CVA, a licensed insolvency practitioner must control the scheme.
Hospitality will always be a precarious industry, with individual businesses experiencing both incredible successes and unprecedented disasters. While it is rare for any business to remain consistently profitable, the best way to continue trading and avoid failure is to seek advice and take action as soon as problems become apparent.
The burden of failure is gradually being removed and, within the financial community, kudos is afforded to organisations that aim to reverse a downward trend, rather than torpedo towards disaster.
Early warning signs
There are 12 key questions which hospitality businesses should ask themselves. If six or more apply to your business, you should seek professional help as soon as possible.
Are monthly, quarterly and year-on-year turnover down over the last two years?
Have bookings dropped over the last two years?
Has your customer base or average spend changed?
Are your margins consistently declining?
Do your internal processes impede customer service?
Are there outstanding accounts and/or tax or VAT older than six months?
Do you have insufficient working capital?
Have any of your suppliers renegotiated or terminated their contracts?
Do you use numerous suppliers to increase the level of available credit?
Do you delay paying old invoices until you need delivery of a new order?
Do you borrow heavily to keep your business afloat?
Are you facing supplier court action?
Action to take if problems occur
Once a company or individual has become insolvent, several courses of action are available. The options include:
Administration, a court-led protection often used to facilitate a moratorium by creditors.
A Company Voluntary Arrangement (CVA), a formal contract between company and creditors that is supervised by a licensed insolvency practitioner.
Receivership, which involves the appointment of a receiver under a floating charge to recover a secured creditor's funding (usually a bank).
Liquidation - winding up a company voluntarily or through the courts.
Dissolution - the company is dissolved and it is struck from the register.
Reserves needed to stay afloat
Owners of hospitality businesses in Cumbria say they will have to use financial reserves to keep afloat as a result of the foot-and-mouth outbreak.
In a survey of 447 businesses by the Cumbria Tourist Board, more than half said they would rely on their savings. Four out of 10 said they would be reducing orders to suppliers and cutting back on maintenance, and a third said they would have to reduce advertising and promotions, postpone or cancel planned investments as well as discounting and reducing prices.
More than a fifth of all businesses said they would have to renegotiate loans or mortgages and reduce staff hours.
Source: Cumbria Tourist Board, foot-and-mouth business monitor, April 2001.
Foot-and-mouth factor in failures
The regions hardest hit by foot-and-mouth are the ones which have shown a significant rise in the number of businesses failing, according to a recent report by Dun & Bradstreet.
In the South-west there were 1,243 business failures in the second quarter of this year compared with 851 in the first - an increase of 46%.
In the North-west there were 1,271 business failures in the second quarter - an increase of 15% compared with the first three months of 2001.
Colin Haig is national director of business recovery at chartered accountants Baker Tilly. He can be contacted at: colin.haig@bakertilly.co.uk; or at Baker Tilly, 2 Bloomsbury Street, London, WC1B 3ST. Tel: 020 7413 5100.
Additional reporting by Keely Harrison
