Many Directors with a struggling business may, after taking professional advice, choose a CVA which allows the business to pay its debts off over a period of time, whilst turning the business around. Having successfully managed a wide range of CVAs ICS have asked Directors operating a business with a CVA how they found the process.
The results are very insightful and helpful to accountants providing advice, and Directors who are either in a CVA or deciding between a CVA and other options; including a pre-pack, a sale of the business or paying off creditors using external funding.
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“I expected it to be hard negotiating with existing suppliers who we owe money to; however it’s also been more difficult than I realised to get the best or even ‘on a par’ terms with new suppliers. This hits our pocket through higher prices and our cash fl ow due to shorter or sometimes even advanced payment terms; its tough.”
Understanding the potential impact on supply and planning how to manage this is crucial to the success of many CVAs. Most Directors expected relationships with supplier’s to be harder but the majority didn’t consider the effect on new supplier relationships. Identifying who your most important suppliers are and thinking about ways you can rebuild the business relationship or prove your new credit worthiness is vital. Advanced payments, shorter terms, exclusive supply agreements and longer lead-times can all help.
“Soon after the CVA began, I knew we were struggling again. I didn’t know what to do and I was unsure about talking to the Supervisor of the CVA so eventually I spoke to my Accountant.”
A common problem is when businesses with a CVA don’t make significant changes and soon run into the same problems that got them into the situation in the fi rst place. Successful CVAs need thorough planning from the client and this ideally involves working closely with an Accountant.
Dividend restriction tough for Directors:
“The restriction on company dividend has made a massive diff erence to the Directors. The extra cost and tax implications are signifi cant and initially we didn’t realise how much this could reduce our incomes. When you are trying to transform a struggling business, all of your costs are higher so its more difficult than before and at the end of the day, the return for their income is so much less than it was.”
Most Directors of SMEs will receive a dividend payment which makes up a large proportion of their take home income whilst operating within a CVA, dividends are not payable as creditors must be paid fi rst and in full before any dividends. This increases costs signifi cantly for the business and many Directors end up working in their businesses for a much lower personal income. Calculating new salaries and tax liabilities is recommended so Directors fully understand the options available to them.
On reflection I don’t think I fully considered the alternatives presented to me because a CVA felt like the ‘right thing to do’. We eventually came out of the CVA and with hindsight it just cost us a lot of time, money and heartache. Through working with our Accountant and Insolvency Practitioner we managed to find external fi nance to get out of the CVA. I realise we were fortunate and whilst we still have debts we aren’t trading with the CVA restrictions which were stopping our business from getting anywhere. This finance arrangement has made a huge diff erence to us, the business, our supplier relationships, price competitiveness, management motivation and more.
When considering a CVA and other options, making decisions devoid of emotion and morality is important. Doing something “because it feels right” might not actually result in paying as much back to creditors as other alternative options. Considering all the options is just the starting point; ensuring a real understanding of how each option aff ects individuals and working out the potential impact of key issues, such as Directors pay,
Also of significance is the number of businesses that may be struggling in a CVA. In this situation, it is important that the Directors and their Accountants have a good knowledge of the range of options available to companies.
Are you an Accountant with a client struggling in a CVA or a business owner considering your options?
ICS provide a full range of insolvency solutions, we work closely with Accountants and Directors to ensure full consideration of all solutions, including external funding. We have successfully helped businesses at each stage of the process; whether it’s just considering options or those that have already started a CVA.
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