What is trading out? - Can we trade out of our insolvency problems
This a a very common approach. You hit a problem that is not life threatening but you have serious cashflow difficulties, possibly Tax and VAT arrears and creditors shouting loudly. Following this guide and applying common sense may help you get out of that position. Beware, note down ALL ACTIONS, DECISIONS and keep replies and correspondence with creditors.
Trading Out - A Guide
Isn't it the most straightforward way of dealing with a cashflow problem
If the company has suffered a downturn in circumstances because of a finite set of issues and the business is not fundamentally weakened or about to fail, then yes. Including the largest companies, every business faces a cyclic cashflow problem. Measurement of success cannot be short term, but events dictate that every company will suffer at times.
A key element of this policy is honesty.
Be honest with yourself, the employees, your creditors and your customers. Without this there is real risk that you will only make the current problems worse.
It is important that you carefully and honestly consider the problems facing the business. Ask yourself the following questions and gauge the answers:
- Is this business viable? If you could remove the problems or the pressure does it have a real long term future?
- Is money all it needs to sort the problems? Can you safely introduce new money, perhaps from your own sources?
- Can you achieve sufficient sales, activity or momentum to cover your costs? We call this critical mass.
- Have you cut all costs to the minimum efficient level?
- If your activity does rise can you:a) Fund it - working capital problems are just as acute for too many sales as too few!b) Produce it - if your creditors will not supply will you be able to deliver sales?c) Justify any further credit you may have to take - is there a reasonable prospect of repaying that credit? If not you may be risking wrongful trading.
- Can you maintain the key people you need?
- Are you able to produce your service or product at a price that the market can sustain?
- Would it be better to close the business and look at other opportunities?
- Have you got the fight in you to keep battling on without support?
- Have you taken advice from professionals? If not talk to our turnaround experts for guidance.
- Have you involved the key partners in your business?
- Are you fearful of taking decisions to close, restructure or sell the business and are seeking to trade out to defer that decision-making process?
If you now believe that the company HAS a future and that the problems are not insurmountable then read on. Trading out can be a very effective tool if handled correctly. There are a number of ways to do this. The key is to achieve a breathing space for the company. this lifts cashflow pressure, right now CASH IS KING!
Merely calling the key creditors, explaining the position: you want to pay them back in full as fast as possible but cashflow is tight and can you pay them over an affordable timeframe, can work wonders. BUT do not do this without a planned approach. You must;
- Work out your cashflow - be realistic. If a debtor is due to pay your company in 30 days check whether they are happy with the invoice and goods, check when they think they will pay. Then add on 10 days at least for a safe margin.
- Build a daily cashflow, if you cannot write spreadsheets use a simple form on a sheet of paper, but update every figure as you go. Why not download our 90 day rolling cashflow model designed by experts for just this purpose, its free.
- Not over promise. If it looks like you can pay all key creditors in 30-60 days ask for 60-90 days. Creditors will usually be happy to work with you if you are honest.
- Not break deals. But if it is unavoidable, write and call the creditors and explain carefully where the plan has not worked.
For more information on this approach visit our Plan A for companies and partnerships
This is not a formal insolvency deal such as a CVA. But the use of a professional turnaround practitioner can ensure that the "honest broker" effect achieves workable deal. Once again the deal broker will want to see evidence that the directors have planned their recovery and looked long and hard at the business and its cashflow. Some creditors may even accept write-downs of debt if they think the company will survive and prosper long term.
As this suggests, the introduction of new money to the company at a time when you are seeking to do a deal with creditors can be a very strong sign that you are serious about the company’s future. See refinancing for further details.
Don’t wait until legal actions have been taken against the company to ask for a deal. Try to plan the cashflow of the business well in advance - you have a legal obligation to do this! If the directors do not think the company has sufficient cash to trade they should consider the obligations and options like CVA and plan a way forward.
Worried about legal actions? go to that page for more details.
Keep a log of all calls and letters to creditors - that way you can check back.
Have a review meeting each week - if you are falling behind take action.
If the plan is clearly not working consider the other options on this site.
Don’t wait too long to get professional turnaround help. Often a CVA can remove the stress and allow you to get back to running the company, not the deals with creditors.
Trading Out - frequently asked questions has much more information - if you consider this to be appropriate then read this page. If there are still unanswered questions contact us on firstname.lastname@example.org
Worried about poor cashflow? Covid-19?, How to pay wages on pay day? For expert advice on a range of issues download our free Ultimate Guide For Worried Directors today. Or just call us on 0800 9700539
Please note that the guide was mostly written pre Covid-19 and there have been some changes to insolvency legislation that limits creditors actions and relaxes rules regarding wrongful trading. A new 20 day moratorium for distressed businesses has also been introduced.