The New Year commenced with two major retail insolvencies (Jessops, HMV and Blockbuster) which followed on from the Comet Administration just before Christmas. One could argue that these failures had been well sign posted with competition from internet retailers cited as the main reason for their collapse but does it also signify further erosion of consumer confidence and do these insolvencies indicate that we can expect more business failures to follow?
My view is that we may continue to see further national retailers fail as the shape of the modern high street continues to evolve but for corporate East Anglia there are significant other challenges that need to be faced.
The number of formal company insolvencies continues to fall which is counter intuitive when you consider the general worldwide and national economic picture but although it feels like it should happen, there is no real indication that the number of failures is suddenly going to start dramatically increasing.
However that is not to say that businesses are not facing real problems and are genuinely struggling to survive. We have all become used to the phrase ‘zombie businesses’ denoting a business that is able to survive due to low interest rates plus the assistance and goodwill from its creditors (including lenders and HMRC) but such businesses are barely generating sufficient income to continue. There is certainly little scope for investment and growth and these businesses are likely to become more and more inefficient as the time comes to replace old and tired equipment, for example, and they are unable to raise the required finance to do so.
The Government Funding for Lending Scheme has been taken up by the high street banks and other lenders and there are a significant number of asset based lenders seeking to increase market share but it remains that the business will need to demonstrate viability to attract this lending.
An essential ingredient to help businesses survive and demonstrate to funders that the business owners are on top of the financial performance of the business is to have a working and evolving business plan and cash flow forecast that are a working planning tool rather than a once a year chore. If the business owners themselves don’t have the ability to produce such forecasts then it is essential that their professional advisers are in a position to assist in such an exercise. A working forecast will enable a business to highlight where the financial pinch points are (eg payments to HMRC, loan repayments, requirement for capital investment) that may threaten the survival of the business. It also demonstrates a professional approach to lenders and other stakeholders alike and will be an essential element if the business needs to negotiate payment plans and turn itself from a zombie business to a business that is able to survive and hopefully thrive.