Voluntary Administration: The Solution that maximises the chances of the business continuing in existence.

WHAT’S IN STORE FOR COMPANIES LIVING ON THE EDGE?

WHAT’S IN STORE FOR COMPANIES LIVING ON THE EDGE?

Early 2015 was a time filled with promise, with the world finally finding its feet again after the Global Financial Crisis. But as the year evolved the blue skies became darkened over some sectors of the economy. The brightest brains say the world is set to evolve at a startling pace and in just a few years the way we understand things today will be just a vague memory. The change, and the rate of it, will have severe consequences to some businesses.

Digital disruption is the buzz phrase of the moment, with the concept suggesting that new ways of providing goods and services will be found digitally and that conventional ways will no longer compete. Clearly the world is a shrinking community and supply is now capable of being achieved from many different sources and in a number of different ways. Local margins are being competed away as a result.

What will that bring for the business that is hanging on by its fingertips? Right now, suppliers will be calling to get paid, landlords will be demanding rent, credit lines will be at their ceiling and sales are likely to slump as consumer demand goes down. January is a harsh month for everyone, and if there are no reserves left to float across this period, the business owner is going to be confronted with some very difficult circumstances.

There are, of course, many sectors that make up the broad economy. Retail is the one that provides an immediate insight into how general business is faring. For example, consider the Dick Smith receivership situation and then widen that lens to consider the recent Boxing Day Sales activity that took place. In many instances these commenced before Christmas Day and ran for over a week or more. Boxing Day sales used to be an event based in a mixture of brand building and clearance of goods that were not Christmas sell-outs. In recent times it has become a campaign to capture vital revenue to keep liquidity flowing so that the immediate cash needs of the business can be met. Unfortunately, revenue earned from those sales may assist in meeting overheads and operating expenses, but will make only a tiny dent in accounts payable.

A common theme coming from commentators now is that 2016 will be a difficult year. The daily press points to the China slowdown as one of the reasons. That makes sense – if the second biggest economy in the world reduces its buying, it is bound to have an impact on our economy as a supplier.

But while it is important to know and understand this economic commentary, it is also important not to react without first considering that commentary is an opinion. This opinion will no doubt be sound, but it is based in macro issues and provided in response to macro facts available at that time. The commentary changes as the conditions change and that can, literally, occur overnight.

The micro position will be different from one business to another and it is important to factor in that business people are extraordinarily resilient and versatile. The commercial will to survive drives the enterprise owner to find new ways to deal with business issues and overcome the commercial dynamics that prevail. I do not suggest that the business owner can beat the economy, but I do support the notion that where there is a will there is most likely to be a way. Viability and liquidity are, of course, key to the survival of the business and its ability to flourish again in the future.

It is worth reinforcing the idea that survival should be a strategic choice considered in light of all the issues at hand. The strategy should be deliberate, thought-out, and bring into account the potential for sustainable viability. Grit based determination, in the hope that circumstances may change, should find no place in the strategic thinking. If it does, it is likely to produce little more than prolonged levels of anxiety and economic stress along the way.

A rational person will know that a positive cannot exist without a negative, and solvency is merely a point along a continuum in which insolvency is at one end. That same rational person will take the view that going from insolvency to solvency is all about choices and the allocation of resource. That mindset reduces commercial reality to a simplification that is more easily said than done, but simplification is sometimes a good thing to fall back on when the business is spinning out of control and into a dwindling spiral.

There is a new wave evolving in the insolvency field. Gone soon will be the legal technician that simply has knowledge of the law and the processes required to be a corporate undertaker. A thorough comprehension of the law is now just the starting point with many layers of commercial experience, legal acumen and ability to turn affairs around being required if business recovery is the motivation.

For those companies that are experiencing the difficulties that come as a part of illiquidity, an option to seriously consider is Voluntary Administration. Business recovery and rehabilitation is at the heart of this legal regime and is the way of the future if preserving the going concern functionality of the business is the objective.

This legal framework imposes a stay for a short period of time. During this moratorium all the issues of the business are considered and a plan for recovery and rehabilitation is prepared for the interested parties to consider. Viability will be at the centre of any rehabilitation plan and will, more often than not, have the directors firmly integrated into that process.

There are no guarantees in commerce. The activity is based in the notion of giving value for exchange. Sometimes this goes wrong and leaves the business owner backed up against a wall with limited options. In those circumstances, living on the edge and hanging on to survival by the tips of your fingernails is a very uncomfortable place to be, and really unnecessary given the alternative option of Voluntary Administration.

I’m happy to discuss Voluntary Administration in more detail if your circumstances suggest that it may be useful. Please contact me directly by email at bryan@bwainsolvency.co.nz or by calling 0800 292 467.

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