THE KNOWLEDGE 31
TIME TO
to keep it afloat without having addressed the reasons for doing it,
the chances of that business being brought back to stability and
profitability recede further and further away until, as must inevitably
happen, it collapses for good when every possible source of
RE-ASSESS
funding has been exhausted.
Insolvency Practitioners are continually exhorted to look, as a
YOUR CREDIT
priority, at preserving businesses rather than simply presiding over
their termination and for those of us who earnestly strive to do so, it
is a frequent disappointment when we find on first being consulted
by a business in trouble that many, often all, of the more
FACILITIES
constructive procedures we might have hoped to invoke are simply
impossible, owing to previous well-meant but misdirected and
essentially futile propping up attempts.
It cannot be stressed too strongly that whenever proprietors of
In recent years, we have become hooked on easy
businesses may encounter an actual or potential need to
credit, with lenders abandoning common sense introduce new finance they ought always to seek professional
and making loans with a blatant disregard for
advice before committing resources.
basic principles such as ability to repay, decent
cash flow or securable assets. Ian Cadlock advises
Clearly, if the purposes for which that new finance seems required
may be any of the first three described above, the right advice will
that we rethink our credit strategies.
quite usually be found from one or more of the business’s
accountants, solicitors, bankers and suchlike. If funds are being
The near-craziness in the credit market seems now to have ended,
sought because of reason number 4, the undoubtedly correct
with a return to more conservative principles and it must be
course is to include an Insolvency Practitioner in the process.
prudent to assess our approach to business in a new world of
restricted credit, as any who are unable to adapt will be left behind
It is worth noting that a side-effect of the lower availability of credit
or may even fail altogether.
has been for debt collection processes to be stepped up for
maximum organic cash generation and the more aggressive the
A starting point could be to consider some of the main purposes for
tactics experienced by debtors, the more panic they must feel.
which credit is traditionally sought and to decide which, if any, are
Ironically however, it just might be that the credit crunch and its
available or necessary for the future.
derivative effects could trigger business proprietors into turning
away from their more instinctive, so often regrettably misguided,
• Stability – examples being of equipment replacement needs, of
approaches to cash crises and towards more planned,
cash inflow smoothing by receivables financing or by seasonality
constructive steps.
offsetting by overdraft
• Transition – e.g. business ownership changes
Perhaps we were becoming too reliant on easy credit to see that its
• Expansion – such as where bigger or more trading locations and
uses are many and mostly beneficial, But in some circumstances,
higher production or stockholding are needed
credit should be taken advantage of only with hesitation. So if the
• Protection – against extraordinary adverse events and pressures
credit crunch teaches us just this, its pain may very well turn out to
have been a worthwhile lesson and we may move into a future
It would be a truism to say that most business failures can be
where unnecessary business failures become rare.
attributed to a breakdown in cash flow: inadequate income from
which to maintain timely payments to creditors will make businesses
Source: Ian Cadlock, Director of Recovery, Tenon
increasingly vulnerable to damaging or even fatal forms of
ian.cadlock@tenongroup.com
recovery action.
www.tenongroup.com
A very common, knee-jerk reaction to a perceived cash flow gap
has been to seek extra funding, but this can very often miss the
more fundamental question as to how the need arose. It should
always be borne in mind that lack of cash is a symptom rather than
a primary cause of a business’s problems and if that cause is not
identified, and if possible rectified, the problems are very likely to
recur, making the relief afforded by plugging a funding gap little
more than temporary and, ultimately, futile.
The process of supporting a declining business artificially by
continually introducing more and more finance may run through
many stages, such as borrowing against the business’s own assets
and when those possibilities are exhausted, against the proprietors’
own resources. Every time extra funds are pumped into a business
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