There are many complex elements in the world of accountancy which are enough to make anyone’s head spin. Yet, when it comes down to it, at its heart, business finance is actually very straightforward.
Ali Redwood from TaxAssist Accountants says she’s regularly surprised at how people in business fail to properly understand the simple fact that when you strip away all the other elements, it is numbers that underpin all their activities. She said: “If I could give a small business just one piece of simple advice it would be to make sure the books were kept properly. If they are not, then you don’t know whether you are making a profit or a loss, you don’t know how much cash you have or how much you are earning as an hourly rate. “You would probably buy in other skills to help you run your business, book keepers are not expensive and they are frequently worth their weight in gold.” She is also keen to get over the message that an accountant can do a lot more than just fill in the vat or the tax forms and they can play a part as a business adviser. numbers, especially if they have been involved with a business since the time it was set up. For example, you might be spending a lot on marketing and advertising. I might ask:what return was being achieved?What customers were coming from which source?Are there other options that might work better? “There are also many other questions, such as are you over reliant on a single customer? Are you properly rewarding costing information so you know what your profit margin is? All these are discussions that an accountant can start which can be valuable to any business,” she added.
BUY NOW, AVOID PAYING LATER
Beyond those crucial fundamental questions there is another layer of more detailed information which can be invaluable. There are far too many detailed topics that an accountant could potentially help with to list here, but this is an example. The goal posts in the tax system are
virtually always on the move and so an accountant can be very useful in keeping you up to date with changes. Any business contemplating capital investment in new plant or equipment should do it within the next twelve months to avoid a new tax hit. Andy Richens, technical tax director at Bishop Fleming, said: “The Budget proposed reducing the annual investment allowance, which provides a 100% deduction for capital expenditure on plant and machinery, from £100,000 to £25,000 from April 2012. This delivers a simple signal that if you need to invest in new plant and equipment, do it over the next twelve months to capture the current tax benefit. If you delay, you could lose out on that benefit.”
READING THE ECONOMIC BAROMETER
When it comes to business planning and making significant decisions about things like major investment in capital equipment, it’s helpful to have an accurate picture of the overall trading environment. However, there are any number of economic forecasts available so it is hard to know for sure just what we have in store. On the side of the optimists is Experian who revealed in their latest survey that the rate of insolvencies has fallen to its lowest point since June 2007. About 3,500 UK companies became insolvent during the final quarter of 2010, a drop of almost 20% on the same period for the previous year. In addition, the average financial strength score for businesses increased a little from 80.79 in August 2009 to 81.06 in August 2010.
The biggest increase came from the smallest businesses with only 1 or 2 employees from 81.32 in August 2009 to 82.22 in August 2010.
- Businesses in the South West led the increase in financial strength with their score rising from 82.23 in August last year to 82.73 in August 2010.
- Only the largest businesses, with more than 501 employees, saw an increase in the rate of insolvencies from 0.09 per cent in August 2009 to 0.14 per cent in August 2010.
- Biggest sector increase in financial strength – Leisure and Hotels, up from 78.10 to 79.34.
- Biggest sector decrease – Food retailing, down from 78.58 to 75.74 this year.
More optimism came from a survey by Baker Tilly, which found that 40% of SME’s in the South West are cautiously optimistic about their prospects for 2011.At the same time, 61% feared a downturn in demand, 41% were concerned about competition from lower cost competitors, 39% worried about rising inflation and 32% about the 20% rate of VAT.
Ruth Foreman, office managing partner, said: “Some businesses will have taken the recent hard times as an opportunity or have been forced to refocus and restructure their businesses into leaner operations. Therefore they have already adapted their expectations and factored those into their view of the midterm. “Businesses may be confident in what they can control and manage themselves but do appear to be less optimistic on the macro factors affecting their relevant sectors and regions, which they deem out of their control. “Ways in which they intend to respond to these challenges are through developing new products and services, increasing organic growth and expanding into new markets.”
GLASS IS HALF EMPTY
On the other side, a more gloomy forecast was produced by insolvency specialists, Bishop Fleming, who gave a rather macabre sounding warning of what they dubbed “Slow Death.” They fear that could be the fate of a large number of businesses who could slip into trouble rather than being rushed into insolvency by the taxman or their banks, though they will still have time to seek help before the axe falls.
Chief executive, Jerry O’Sullivan: “For their own purposes, the two bodies which drove most business failures in earlier downturns,
the Treasury and the banks, have been holding back from pulling the rug on ailing businesses in the current downturn. “During previous recent recessions, the banks employed fewer specialist staff, so large numbers of businesses went under because they did not have the capacity to deal with problem cases. Also, at that time, the Inland Revenue was reluctant to give businesses extended periods of credit to allow them time to pay their tax arrears. “The difference this time is that banks are trying to restore their own reputation, and avoid being seen as the ‘devils’ who fail to support businesses, while the coalition government is keen to constrain the taxman from killing off the private businesses upon which the economic recovery is based”, he explained. “The good news is that this means ailing businesses have a brief opportunity to seek and apply professional recovery advice. It can be an emotional issue, as no business owner likes to admit that there is a problem, but it is far better to save the business than to be tipped over the edge,” he explained.
IF ALL ELSE FAILS
Naturally, it is to be hoped that by careful financial planning and management, every business will prove to be successful. But it is realistic to accept that will never be the case and so it will be necessary to prepare for failure. The British Chambers of Commerce has been working to help members with R3, the trade body which represents more than 97% of Insolvency Practitioners. They have come up with some helpful advice for businesses dealing with insolvency – the moment a business is unable to pay its debts as they fall due.
WHAT DOES AN INSOLVENCY PRACTITIONER DO?
They act in a number of capacities, most often acting as administrator, liquidator, Trustee, or supervisor of a voluntary arrangement. Their role involves turnaround and rescue as well as realising and distributing assets. In every case, IPs are duty bound to act as Officers of the Court and their job is to maximise returns to the creditors who are owed money. Generally the best return to creditors is if a way can be found to keep a business operating. But when that is not possible the only option could be liquidation and the sale of the company’s assets.
THE POSITION OF CREDITORS
Not unreasonably, the starting position of any creditor is that they should be paid their debts in full. However, an Insolvency Practitioner is involved in a salvage operation rather than a normal business process and the reality is that unsecured creditors of a company in financial trouble very rarely receive all, if any, of the money owed to them. IPs must follow a strict order of priority, which is set down by statue, when it comes to distributing the available money realised by selling assets. The lower a creditor’s position in the priority order, the less they are likely to receive.
Priority order for payment
- Chargeholders, or secured creditors who have a legal right or charge over the property
- The fees and charges of the insolvency
- Debts due to preferential creditors, which includes unpaid holiday pay, wages owed in the four months before the date of the insolvency order and contributions to occupational pension schemes
- Any creditor holding a floating charge over an asset, such as a debenture
- Unsecured creditors, including HMRC
- Interest payable on debts
- Shareholders
THE PRE-PACK OPTION
There are many ways that insolvencies can be handled. One of them is to create what is called a “Pre-pack”, which is an agreement for the sale of an insolvent company’s business and assets put in place before the company actually goes into a formal insolvency process. The terms will have been agreed before an Insolvency Practitioner is formally appointed and is then rapidly executed once the appointment is made. One of the benefits of Prepacks is that more jobs are preserved. Research has found that in as many as 92% of prepack cases, all the employees were transferred to the new company compared with 65% when the business was sold. There is also good evidence that they produce a better return for secured creditors.
FOOTING THE BILL
The cost of handling insolvencies vary widely, depending on the type of case and the knowledge and experience of the people involved. The vast majority of IPs work in small or medium-sized firms or in regional offices of larger firms where charges run between £100 to £300 per hour. Around 15% of IPs work in large firms, tending to focus on very complicated cases, requiring considerable expertise and resources.
In most instances fees are paid from the pot of money and assets that is distributed to creditors during an insolvency, so, in effect, creditors pay an IP’s fees. The topic of insolvency may sound a bit gloomy and it is always disappointing to see a business fail. However, it can be avoided by keeping an eye on the economic environment, a firm hand on the finances and making the best use of your accountant.