Weathering the storm

Features Posted 30/12/22
What practical advice and support is available to SMEs as the UK braces itself for a financially tumultuous 2023? We talk to Crowe UK’s Steven Edwards to find out…

2023 is just around the corner, and for many businesses, challenging times lie ahead. We’re still working through the effects of the pandemic and the Bank of England expects the impending recession in the UK, signified by high interest rates, increased costs and wage pressures, to be the longest since records began.

The government has implemented support measures for businesses with energy costs, however, will that go far enough to save companies from the trials and tribulations of the coming year? This is a question Steven Edwards, a partner in the Recovery Solutions team at Kent-based audit, tax, advisory and risk firm Crowe UK, is asking.

Steven believes that businesses with a customer base that comprises lower income households will be harder hit than others and he also expects insolvency numbers to significantly increase, with a resultant loss of jobs. “Some businesses have been in survival mode for several years, supported by low interest rates and low inflation,” says Steven. “With the additional economic pressures, I consider that a large number of those companies will cease to exist, leaving behind suppliers that will be unpaid and possibly facing their own cashflow pressures as a consequence.”

Steven’s career in business recovery started when he graduated from university at 29. He became an insolvency administrator for a West Sussex company, working with small and family-run business owners. Then, in 2009, just after the Banking Crisis, Steven joined the restructuring and insolvency team of a top ten firm of accountants, which provided services to larger privately-owned businesses and PLCs. During this time, he qualified as an insolvency practitioner.

Steven joined Crowe UK at the beginning of 2014. Alongside his colleagues, he has helped to build an experienced, successful and motivated team, saving the businesses and jobs of many clients and working his way through to becoming a partner. “There can be a lot of negativity surrounding the title of insolvency practitioner, which is frequently aligned with ‘doom and gloom’,” he explains. “However, in common with many in my role, my first thought is not how I close down a business, but if I can turn it around to help rescue the business and the jobs of employees.”

Being part of Crowe’s Recovery Solutions team, when Steven first meets a director of a company in financial distress, his initial role is to listen to their concerns, understand how the business works and identify the critical issues that need to be addressed. “I then explore the options available to a company and if it is possible, I look to rescue the business and save jobs. If a recovery plan can be put in place, we will work with a company to deliver the plan to a successful conclusion, reducing the stress and emotional burden being experienced by directors.”

This may take the form of carrying out negotiations with landlords, lenders, HMRC, shareholders and other major suppliers, and reaching an agreement between those parties to resolve difficulties. “We can also assist with cash flow management, helping to extend the payment timetable through improved prioritisation, tighter control of working capital, sale of peripheral assets and unlocking additional assets such as tax credits,” adds Steven. “If advice is taken early enough, then the possibility of a recovery plan being implemented, without the need for a formal insolvency, increases.”

When a formal insolvency procedure is required, Steven may be appointed as a company’s liquidator, administrator or supervisor – depending upon the circumstances. His main duties are to identify and recover assets and to pay creditors the amounts they are owed from the assets realised. He also helps business owners of solvent businesses liquidate their companies. This is often used as an exit strategy for a company as there can be tax efficiencies when a distribution of capital is made by a liquidator as opposed to a dividend under income tax rules.

Of late, Crowe UK has dealt with the rescue of a charitable organisation located in Kent. When Steven and the team first met with the directors, it was agreed that there was a way forward that would avoid a formal insolvency process. Crowe was initially instructed to lead on the sale of the company’s freehold property, to investigate short-term refinancing options and to wind down its business operations over three months.

Steven explains: “During the early phase of our instruction, the company found itself without the anticipated funds to pay its employees. The directors loaned money to the company, but it was not enough to pay wages and ensure the short-term survival of the business. The company had little choice but to reassess its options and it was decided that it should enter into administration.”

During the administration process, all business activities were wound down and the freehold property was sold. The sale proceeds were sufficient to repay all of the company’s creditors with interest. The administration was bought to an end and the company, together with a substantial surplus of cash, was handed back to the directors. It is now operating free of its loss-making business, using the surplus from the property sale to continue its charitable aims.

So, what is Steven’s top advice to businesses entering 2023? He emphasises the importance of regular preparation of financial forecasts, which will indicate if financial issues are likely to arise and determine the extent of any issues. “The issues may be easily addressed but if they are not, it is essential that directors plan and act appropriately,” he states. “Directors must act for the benefit of a company’s creditors in their decision making, rather than their duty being to shareholders.”

Steven adds that, in challenging times, business owners may need to consider implementing a cost reduction strategy to effectively utilise available resources. Cutting costs, he says, often requires tough decisions and trade-offs, without affecting an ability to grow. “A business owner will have their own ideas on how costs can be reduced, typically with a reduction of staff being the last alternative.”

Without sounding self-serving, he continues: “The best advice for any businesses in financial difficulty is to seek assistance from a qualified and regulated insolvency practitioner and do so as early as possible. Insolvency practitioners are best placed to provide objective advice on the options available, looking at the positives and negatives of each potential solution and sharing best practice based on their experience of similar situations.”

According to Crowe UK, what areas should be considered to manage costs?

  • Reduce property costs by more remote working by employees
  • Review premises requirements (sharing office space, downsizing or dual-use spaces)
  • Review supply chains – ask if goods can be sourced at a lower cost
  • Invest in modern technology to increase efficiency
  • Consider hiring serviceable refurbished equipment
  • Review staffing requirements and invest in employees to assist in staff retention
  • Consider whether your marketing channels are effective and up to date
  • Chase unpaid invoices/ reduce debtor days
  • Request discounts from suppliers for early payment and ensure payments are appropriately prioritised
  • Use and maintain budgets and financial forecasts

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