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How is it that time of year again?! The autumnal orange leaves have fallen from the trees and fireworks have swiftly been replaced with the twinkle of Christmas lights. That’s right, it’s the time of year we have a tendency to splurge out and indulge in the festive offerings – but will businesses be thriving or feeling the festive pinch come January? 

At Thomas Westcott, we have already received phone calls from local businesses expressing concerns over the upcoming trading period.

The festive period can be a risky time for many businesses, particularly consumer-focused sectors like retail, restaurants and leisure. That’s because some businesses have faced tough trading conditions all year, often due to a general decline in high street stores and continued growth in ecommerce, leaving many SMEs to rely heavily on Christmas trade periods to boost profits. Yet what temporary sales spurts usually offer is little more than false hope and the company’s debts come back to haunt them.

It serves as a useful reminder that directors may be liable for wrongful trading under the Insolvency Act 1986 if they continue to trade when insolvent without a reasonable prospect of returning to a profitable position. The burden of proof is low: there need not be any intent to defraud creditors, merely poor judgement exercised by directors. Essentially, continuing to trade with a hope that things will improve when in fact it is evident the Company is on a downward trajectory is enough to fall foul of the law.

With this in mind, here are some practical steps to take in the run up to Christmas:

 

1. Management – Prime time to assess your cash flow and forecast the remainder of this quarter and into the next. Think about where your shortfalls are, what contingencies you have for periods the business is closed over Christmas whilst expenses are still paid out and confront any ceiling borrowing.

Most importantly, assess whether you have enough cash to trade as you currently are without putting your business at risk. It is easy to put your financial concerns on hold in order to make short term gains for your business, but you should really be making a considered decision as to whether you are able to return to a stronger (favourably solvent) financial position.

 

2. Pre-Christmas Invoicing –  It is good practice to periodically review your debtor ledger and take actions as and when to shrink it. What may alleviate the post-Christmas slump is to ensure invoices are sent out well ahead of the Christmas period, so as not to be forgotten about until January. This may be particularly helpful for consumer-focused businesses because spending often stalls in the new year following the increased use of credit cards by consumers in December.

What’s more, directors should be focusing on getting the cash in by chasing up any unpaid invoices. SMEs tend to shy away from chasing debts, but a quick phone call is all it can take to remind a debtor. You could even offer a discount to those who pay immediately.

 

3. Financing – This should not be your default solution but whilst interest rates remain low, and so long as you merely need a short term solution, you could consider talking to your bank manager to get an overdraft extension. It is imperative though that you avoid the temptation to use increased credit to fix systemic financial issues the Company has.

It may also be worth negotiating with suppliers to extend their invoicing period to February, which will help make the post-Christmas period manageable and keep more money available in the meantime. Just don’t forget to account for the expenditure in February!

 

4. Exit – You may decide that the best recourse is to wind down the company. Creditors’ voluntary liquidations happen when recovery is just not possible and to protect the interest of creditors. Directors – insofar as they are not guilty of insolvency offences and do not re-use the trading name – still have the option of starting afresh with a new company.

 

It may be useful to coincide the closure of the business with a prominent sales event. For example, the Boxing day or New Year sales. This may avoid arousing creditor suspicion and having a clear exit strategy can provide comfort and reassurance to the directors that the situation is being managed appropriately.

Although December can be a time to cash in on the consumer spending hype, there are many businesses that rely solely on Christmas trade to take their best shot at avoiding insolvency; often they delay an inevitable closure in the new year. It is important that if you have concerns over whether your Company can survive the festive trading period, you seek advice in the first instance. Delaying an intervention is only likely to increase debts and means that the business gets further away from a recoverable position.

 

If you’d like to talk through your options, please call a member of the team on 01392 288555.

 

By Laura Tudor, Insolvency Administrator