Partner Article

Check balance sheets and keep your company healthy

Leading financial expert Deborah Lockwood says it’s time for businesses to take stock, examine their balance sheets and make some tough decisions about the year ahead.

Deborah, a partner in Sheffield insolvency and business turnaround specialists Graywoods, says that companies have to take a long and realistic look at their finances.

And in particular, they need to explore the ongoing problem of unpaid debt and just how much it is affecting their chances of successfully moving forward.

“It really is a question of businesses assessing if they are actually solvent,” Deborah explained.

“It’s about stepping back, taking a look at their ledgers and actually working out whether or not unpaid debts are going to come in, are those customers going to pay.

“Leaving the invoices on the balance sheet when you know there is no way they are going to pay may make it look like the figures are good but bad debtors are of no great use to a business which may be struggling with cash flow.

“While some directors may look at selling or assigning these debts, this can often result in additional costs and increase the likelihood of the company losing proper control of their ledgers, immediately creating a bigger problem than they had originally.”

Deborah added that the issue of bad debt was one that all companies faced and one that had been exacerbated by the pandemic and the implications of government support, bounce back loans and HMRC repayment plans, all of which were now being called for payment.

“Now, more than ever, is the time to looking at the underlying cause of any struggling company’s debt portion and ask very seriously if an invoice is going to be recoverable,” she said.

“Never forget that even as people talk about living in a cashless society, in the business world cash is king and without properly managed cash flow there is no successful business.

“For any company thinking that further borrowing is the answer, rather than calling in those outstanding debts, then they have to be aware that borrowing to fuel cash flow is not the answer but that bringing in those debts can assist things enormously.

“Keeping on top of bad debt should always be a good habit to get into, a good discipline which demonstrates that you are aware of how healthy your finances really are.

“During the pandemic, some businesses took on levels of borrowing that they would previously have never considered taking on, nor would they have been approved or been able to obtain such large amounts of borrowing.

“That, coupled with arrangements with creditors including HMRC, is bringing companies to the point where they are gathering levels of debt where even repayment plans are becoming unmanageable.”

Deborah said that it was businesses which, prior to the pandemic, had been reluctant to take on high levels of borrowing, which were now being left particularly vulnerable.

“They saw borrowing for the first time perhaps as a way out of a cashflow crisis but taking out loans for additional funding can be a very problematic approach and certainly a short term one which had no view of the future with no thought for underlying issues such as reduced customer demand, increased costs and other uncertainty,” she said.

“Directors should not be committing to additional borrowing without having a full understanding of the company’s current financial position and a realistic cash flow projection in order to justify their actions.

“Above everything else, they need to be mindful of their current levels of debt and not simply act without due care and attention and without thinking of the consequences of their decisions.

“Such decisions may lead to asset erosion resulting in even greater costs and vulnerability moving forward.”

“There are so many different ways in which people try to work their companies out of the situation that taking on extra borrowing has caused but these need to be considered very carefully and, as ever, the best thing to do is to seek professional advice before before committing to an arrangement that simply adds to the problem.”

This was posted in Bdaily's Members' News section by John Highfield .