Is the worst still to come?

Figures for court petitions cast an interesting light

Figures released by the Government have shown that more individuals are petitioning for their own bankruptcies than ever before. At the same time, the number of creditors using bankruptcy to enforce debts against individuals has reduced slightly, as has the number of creditors using winding-up proceedings to extract debts from limited companies.

These figures echo statistics released previously which showed that the number of individuals going bankrupt was at historically high levels. In July to September this year 16,266 people asked the courts to make them bankrupt, the second-highest quarterly figures on record and an increase of 18% on the same period last year. These are big numbers but perhaps, given the current economic climate and the fact that the number of people entering bankruptcy has been rising steadily for more than a decade, not too much of a shock. If fact, I had thought that the bankruptcy statistics could be higher than were reported.

The figures for creditors using bankruptcy and winding up as an enforcement method have been far more stable in recent years and, given the current economic climate, the consistently unremarkable numbers actually make them far more more interesting. The numbers are down in both categories this quarter in comparison to the same period last year, which was also an unremarkable period.

So despite increasing numbers of individuals and companies getting into financial difficulty, their creditors are less inclined to pitch them into insolvency in order to try to recover their debts. Why?

On the face of it, this appears to be counter-intuitive but I believe that two key factors are currently influencing the figures. Firstly, I have found that lenders are unwilling to tip anyone into formal insolvency proceedings at the moment. There is still a general lack of credit available and this has constrained buyers who would otherwise have hoovered up cheap assets at distress sales. This makes recovering debts from asset sales far too risky at present for many lenders and they are therefore concentrating on serviceability of debts – ie as long as they receive current month payments, they are far less interested in the recoverability of liabilities (for now).

Secondly, HM Revenue and Customs are being uncharacteristically lenient in their arrangements with debtors who are unable to keep up with their tax payments. The Revenue is usually responsible for a large proportion of all bankruptcy petitions and winding up petitions. Any reasonable offer to pay is currently being accepted by HMRC and the organisation appears to be acting under instructions to offer a breathing space to businesses with the aim of preserving employment where possible. Closing down large numbers of businesses is currently politically unacceptable (again, for now).

I haven’t got a crystal ball so I can’t accurately predict what will happen next year. But my guess is that we will see increasing numbers of bank foreclosures as lenders become more confident that they can recover outstanding debts. In addition, there is likely to be a big increase in legal action by HMRC, as unrealistically optimistic  offers of payment come back to haunt debtors. Whatever happens, 2010 will be an interesting year.

www.moorheadsavage.co.uk

How to avoid insolvency in the first place #2

It's all about profit

I get asked to help businesses because they’ve hit (or are heading for) a financial brick wall. Something usually triggers the invitation that I’ve received: it could be that the bank manager is concerned about the way the bank account has been run recently; it could be a threatening letter from a major creditor or even a winding up petition. Whatever it is, it’s always to do with money, or the lack of it. So my first job is to find out what makes the business tick from a financial point of view.

All too often, I am met with blank expressions when I ask for costings, cashflow forecasts and profit-and-loss forecasts. This type of financial information can be collectively referred to as “management accounts” and unless business owners have good management information at their fingertips, they can’t make proper decisions about how to run their business. Business owners often know exactly what their turnover will be for the month or year and they easily reel off figures for how much a particular job or contract is worth in terms of the selling price. But the key issue isn't price - it's profitability. There’s no point being a “busy fool” as one of my former colleagues used to say. That’s why it’s essential to know which areas are profitable and which need to be overhauled, re-designed or scrapped. Almost invariably, it’s far better to make a 10% net profit on a turnover of £100,000 than merely break even or make a loss on a turnover of £200,000. It’s no surprise that businesses who don't have a proper handle on their costs end up with serious or even terminal debt problems.

The problem tends to stem from the fact that businesses are set up by people who are extremely good at their job, whatever that job may be, and who are driven by a desire for the potential benefits of self employment. So a good panel beater, or chef, or IT expert, decides to go into business to offer their expert services to the world. Great. However, that panel beater, or chef, or IT expert may have very little knowledge and experience of actually running a business, which usually requires a completely different set of skills. And even if they have those skills, the need to do the business, beat panels, cook great food or do great digital stuff often gets in the way of running the business.

Most firms aren’t big enough to need a full time accountant or bookkeeper, but the good news is that there are a number of people around who can spend as much, or as little, time as necessary in making sure that the wheels don’t fall off your business. They make sure that you have the information you need to decide how best to run your business and the (usually quite low) cost is usually recovered many times over in terms of better decision-making and enhanced profitability.

Try searching for accountants and bookkeepers in your area. Or feel free to contact me and I will recommend some who I've worked with in the past.

www.moorheadsavage.co.uk