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Key issues identified on recent cases we have acted on

Author: Simon Glyn
11 February 2011

We recently carried out some research across our FRP Advisory partners, in order to ascertain some underlying issues on cases we have had referred to us in recent months. All the cases analysed were corporate entities with the reason for distress indicated below being made up of some 'old chestnuts', but also with some reflecting the times we are in.

The intention of this note is to put the research into some general headings to demonstrate to live side bank relationship managers/directors who operate in the SME market place, some areas to potentially watch out for and the need to understand them in more detail if flagged, when next speaking to or meeting with your customers.

Potential areas to watch out for include:

• Directors distracted from the main business to pursue other interests/investments and entrusted the day to day management to others who did not possess the necessary skill set to do so

• Seasonal businesses either not meeting peak period projections in the current climate or behind budget in the low season and, unrealistically, continuing as before just “hoping” to recover the shortfall in their forthcoming peak period

• Insolvency/retrenchment  of major clients resulting in a reduction in orders that may be too damaging to recover from- "too many eggs in one basket"

• Fear of upsetting a major client resulting in blind acceptance of new or continuation of, loss making contracts. This was exacerbated by increasing delays in obtaining payment

• HMRC Time To Pay stance hardening-Crown no longer prepared to supplement working capital of the business

• Overly optimistic projections that were regularly revised but continually not met, resulting in unsustainable funding requirements  and the confidence of the bank gradually eroded

• Private Equity firms not prepared to continue support with inadequate return

• Lack of demand in the sector (eg. construction) taking a further dip in relation to companies that support the sector

• Expansion undertaken  immediately prior to the recession; turnover of enlarged business then fell away as a result of client cutbacks, resulting in vulnerability from existing high gearing which could not be serviced

• Poor and late Management information hiding underlying issues such as high drawings not being reduced to reflect a weaker trading position

This list is by no means exhaustive, but provides some good indicators to watch out for.

If you wish to find out more information, please do not hesitate to contact Simon Glyn on 07768 467 042 or email us by completing the online form below.