Lessons for retailers post-Jaeger collapse
Stephen Young identifies some of the warning signs retailers should be aware of when it comes to leading a business out of a solvency crisis
The retail sector has suffered more than most since 2008’s financial crisis, which has resulted in high-profile casualties such as Woolworths, BHS and HMV.
In 2017, there have already been 12 retail significant insolvencies affecting 771 stores (which is more than the whole of 2016), including Jones Bootmaker, 99p stores and last week Jaeger.
At the same time, Begbies Traynor have reported that over 23,000 retailers were under financial stress during the first quarter of 2017.
Trading conditions in the retail sector have become tougher, particularly given the increased competition from online retailers. Attempts to stimulate the sector through sales or the introduction of Black Friday have had little impact, whilst traditional retailers have yet to see the effect of the increases to business rates which came into force earlier this month.
When increased competition in the market is paired with the weak pound, worries over Brexit and living costs, it is no surprise that consumer spending is at its lowest level since 2013.
Many retailers are now backed by private equity investors who are also seeing a decreased value of their stakes and are now examining ways of limiting their losses, including selling or restructuring the business through an Administration (such as Jones Bootmaker) or a CVA (such as Blue Inc). Therefore further high street as the year progresses are expected.
Retailers may also be struggling due to the way the company is managed. Poor communication, ignoring professional advice, a high staff turnover and a lack of understanding of where the work and income of the business comes from are all key symptoms that can lead to financial distress.
So in today’s increasingly competitive marketplace – what should retailer directors, in particular, be alert to when it comes to maintaining a thriving business?
1. Cashflow issues
If the company’s profit margins are declining, it invariably will start taking longer to pay its creditors. The reduction in profits might be due to a slowdown in turnover, or because the company may have suffered some bad debts or made a loss on a piece of work. Failing to pay creditors on time might result in suppliers limiting credit terms or at worst, refusing credit. Where cash flow is tight, it is also not uncommon for directors to use their own money to pay the debts of the business in the hope to alleviate matters.
Failure to pay creditors on time can mean the company is constantly making “firefighting” calls, seeking extra time to pay or using several suppliers to garner additional credit. The company’s own suppliers may seek take out credit insurance or worse still, take recovery action against the company.
2. The bank
A clear sign of financial distress is when a company is continually pushing or exceeding its overdraft or other banking facilities. Cheques may also be being returned unpaid. In those circumstances, a bank may refuse to increase its facility and may even seek to reduce it.
Alternatively, a bank may require additional security, including personal guarantees from the directors or security against their personal property. A bank may also transfer the account to a specialist team if it considers its exposure to be at risk. Refinancing may assist in the short term but may simply be putting off the inevitable if the company is poorly managed.
3. HMRC & Companies House
A business might file their VAT returns late or not pay their tax on time when facing a tough financial period. They may use money earmarked to pay HMRC to pay other liabilities in tough times. A company may also be late in filing statutory documents at Companies House.
Failure to file documents on time with HMRC and Companies House will result in late filing penalties being levied.
Crown debt arrears will result in HMRC taking recovery action, whilst following an insolvency, trading to the detriment of the crown is frequent ground used by the Secretary of State to disqualify directors.
4. Increasing debtor days
The longer debtors take to pay, the less cash flow the company has. The position is worse if the company relies on a small number of key customers who are not paying on time.Increasing debtor days may be caused by poor company management, such as a failure to properly chase payment of invoices or worse still, a lack of understanding as to who owes the company money.
Reducing debtor days and late payments requires proper management. A company should operate a strict debtor collection policy that is reflected within any terms of business. The company should actively chase any unpaid invoices that are close to or exceed the company’s payment terms.
A company is considered to be insolvent if the value of its liabilities exceeds its assets or it cannot pay its debts as they fall due. The fact that one or both of these factors apply to a company does not necessarily mean that it needs to close or cease trading.
However, seeking specialist insolvency advice at an early stage can allow the company to properly manage the situation or allow for a strategy that might save the business. Failure to do so is a key reason why many companies fail.
Stephen Young is an insolvency lawyer for Keystone Law