Plan to adapt
Whilst daunting, if you know you are going to lose a large customer for reasons other than their insolvency, you will generally have some time to adapt. But this isn’t the case when a customer suddenly goes bust, leaving a large unpaid balance on its account.
So what can you do? First of all, you must breathe. Blind panic won’t help.
Secondly, assess the situation and find out what has happened. If a customer has entered into insolvency proceedings find out which Insolvency Practitioner is dealing with it and what they are planning to do. If they are going to trade the business ascertain whether your services/supplies are key for this strategy. If they are, you have potential bargaining power which, whilst it may not mean you get back the money you are owed, may yield some profitable short term business. Trading with Administrators, despite what many think, tends to be very safe – they must, as a general principle of law, pay for what they use and the costs they incur are paid from the funds they realise in the Administration. Make sure the terms of any future supply are well documented and are signed off by the Administrator before any further supply is given.
If this is not an option, check whether the customer still holds any of your products and contact the Insolvency Practitioner’s office to arrange to visit the customer’s premises as soon as possible to identify the goods and arrange for their collection. This is key, particularly if the Insolvency Practitioner is contemplating a quick sale of the business. You do not want your unpaid stock being sold to a third party. To enable this you must claim “Retention of Title” over your stock and the strength of your claim will depend upon whether your dealings with the customer incorporate these terms.
Filling in a claim form takes minutes and is worthwhile
Finally, and whilst not immediately pressing, submit your claim to the appointed Insolvency Practitioner. It is commonly understood that distributions from an insolvency process are rare, but it does happen. Filling in a claim form takes minutes and can be seriously worthwhile. We recently dealt with a case where a significant creditor hadn’t submitted a claim and when questioned, stated they couldn’t be bothered. When they were told that if they did they would receive a cheque in the post for circa £40,000, they quickly changed their mind. Be warned, however, that even on successful restructurings the timing of any dividend is likely to be protracted and you should not rely on this for your immediate or mid-term cash flow requirements.
Remember, the faster you react the better your chances of softening the impact on your business. And once you have dealt with the practicalities of dealing with the insolvent customer, you should immediately assess the short term cash flow effects on your own business and how you can address them.
Some quick wins
If you are VAT registered fill in a bad VAT debt relief form. Whilst this won’t generate funds it will ease your cash flow pressure when the next Vat payment is due.
If you have credit insurance, notify your insurer immediately and ascertain what you need to do to submit a claim. Ensure you have copies of all documents relating to the debt including any contracts or terms of supply.
Cash Flow
Review your working capital and cash flow forecasts. If you don’t do them, now is the time to start. It’s important to quickly determine whether you can survive the impact on current reserves and working capital, or whether your business is likely to run out of cash in the near future causing pressure on your supply lines and putting your own business at risk of insolvency. Identifying when a cash flow problem is likely to occur is the first step to evaluating your business so that you can put in place plans to remain a going concern.
Remember cash flow is a problem that all businesses will encounter and can be managed with careful planning as long as you are confident that the business can remain or become profitable in the long term. Before you take any further action you must assess whether your business can return to profit despite the loss of the customer.
This is not an easy exercise: you must review your profit and loss forecasts and ascertain whether the income from your other customers is sufficient to cover the fixed costs of your business and generate a profit. If you need help with this, discuss with your accountant or contact a restructuring advisor who has expertise in forecasting.
There is no point in addressing a cash shortfall if you can’t demonstrate profitability: if the business isn’t going to be profitable on its current fixed cost base, you must review what fixed costs can be eliminated. Typically this may mean making redundancies, cutting out unnecessary expenses, reducing salaries and possibly downsizing premises. Whilst these actions themselves can cost money, as long as they will return you to long-term viability then you should act sooner rather than later. Unnecessary delays, however hard some of these decision can be to take, can make the difference to whether your business will survive or not.
Once a plan has been drafted you will need to look at whether you need additional finance to action these and bridge any working capital gaps in your current cash flow.
If you are reluctant to take on more debt through ‘traditional’ means (bank loans, overdrafts and increases in facility drawdowns) there are other options to help alleviate short term cash flows, such as:
You should also talk to your bank / finance provider about how they can help with cash flow, or consider whether an alternative lender may be able to offer you facilities which provide you with more working capital. In all of the above, if you are unsure, get help from a suitable restructuring professional; engaging their services doesn’t mean your business will fail – it will hopefully keep it viable.
Whilst we all know it’s good business practice to not have all your eggs in one basket and be over-reliant on one customer, in reality this isn’t always possible. Although the insolvency of the customer isn’t your fault, could you have spotted the warning signs earlier? It’s tempting to focus on turnover, but you should try to keep all of your customers under ongoing review by checking credit ratings, industry news and analysing their payment patterns to identify changes. If you are concerned that payment time is creeping up or they are increasing their credit with you then you should contact them for a meeting at the earliest possible stage.
Be pro-active, stay in control
Finally, it is always important to understand that all businesses change and evolve and this is just a natural part of business. If you are over-reliant on one customer, even if it makes you extremely profitable, always consider how your own business can adapt and progress into new revenue-generating opportunities to increase your customer portfolio.
A customer insolvency or loss is bad for your business and happens to most businesses at some point, but if you plan properly it shouldn’t be the end of the world. By being pro-active you’ll always be in control of your business rather than leaving its fate to others.
