Business Administration
In the last few months there’s been a lot of news about companies going into business administration. MFI, Woolworths, and Waterford Wedgwood are three high profile businesses that ran into financial problems and had to call in the administrators.
Similar challenges have also forced many smaller businesses into administration. But what is ‘administration’?
It is a legal term that means a company is focusing all of its efforts on paying its creditors and trying to survive. A business rescue specialist, an Administrator, is appointed to lead the process and their responsibility is to do all they can to pay off suppliers and other creditors while also keeping commercial activities alive.
The objective of administration is the survival of the business as a going concern. It can be a hard and painful process, often requiring branch closures and job cuts. It may even mean selling some or all of the business. Complete closure is the option of last resort.
How does business administration work?
There are several ways in which a company can enter into business administration. The directors might decide it’s necessary, based on their understanding of the financial situation. Directors, partners or creditors can apply to the courts for the appointment of an Administrator. Or the holder of a qualifying floating charge over the company’s assets, such as a bank, has the right to initiate it.
Once appointed, the business administrator becomes an officer of the company and takes over the running of the business. They will be keen to pay off creditors as soon as possible, and they have a legal responsibility to deal with them consistently – they can’t favour some above others.
Costs which they determine to be unnecessary, given the seriousness of the situation, will be cut, which is why administration often leads to redundancies. But while they want to raise money to pay creditors, they also want to do all they can to ensure that the business can, in some form, weather the crisis.
In 2002 the government made it easier for businesses to go into administration. The thinking is that when a business is in trouble it needs to face its problems sooner rather than later. The challenge is that many businesses fail to identify there’s a potential problem until too late.
How can I avoid business administration?
The easiest way to spot trouble ahead is to project cash flows for the coming 6-12 months. It doesn’t matter how profitable a business is on paper - it can’t function for long if there’s no money to pay staff or suppliers.
Putting together a cash flow forecast is simply a case of estimating all the money coming in and going out, on a month by month basis. It must be approached realistically – if most debtors are currently paying in 60 days, this must be reflected in the forecast. There’s no value is being unreasonably optimistic about how things might turn out.
Cash flow forecasting will identify whether there are any cash shortfalls, which in turn requires a plan for how these will be dealt with. Where can your business go for credit? You may already have an overdraft facility. There are also plenty of other options for improving cash flow, such as invoice discounting. This could give you up to 90% of the value of your invoices the day after you raise them, putting cash in the bank. Or you might have opportunities to sell and lease back some of your most valuable assets, again freeing up that all important cash.
A finance solution that’s right for one business may not work for another. We recognise this, which is why Touch Financial operates in partnership with our customers. We understand the value of mutual benefit and shared success in today’s challenging commercial climate.
We offer a range of services that work for businesses of any size, and because we’re 100% independent, our focus is on delivering the maximum benefit to you, the customer. So why not get in touch for an initial, no-obligation consultation?
Also in this section:
