The importance of “No”

The importance of “No”

As an insolvency practitioner and mediator, Gary Pettit is Managing Director of PBC Business Recovery & Insolvency  and is a Licensed insolvency practitioner and accredited mediator who has worked in the insolvency field for over 33 years.  In this guest blog post he discusses Cash Flow and in particular the importance of saying NO, even when cash is tight.

I am currently seeing the same patterns in the business world as we exit the coronavirus pandemic.  The headlines being:

• My bounce back (or CBiL) repayments have started.
• I cannot get supplies so am unable to earn.
• Creditors are starting to press for payment.
• I am in dispute with my fellow director/shareholder.

Much of the above can be summarised in one word – cashflow.

Cash is king, we are told and it certainly seems to be correct at the moment.  Even management disputes generally revolve around cashflow issues, creating stress within the workplace.  So, if cash is tight, how can businesses say “No” when approached to undertake a supply or service or, in some cases, that life-changing contract with a large brand?  Surely this is a source of income and resolves those cash flow issues?  Well, naturally, in most cases that is correct.  However, sometimes saying no can be the best decision you could ever make.

Customers

 Have you ever been a creditor of a customer who has entered into an insolvency event?  How frustrating is that and what is the cost to you in terms of lost revenue and the length of time it will take to recover from that loss?  When I am asked to advise creditors, I hear time and again, “I thought they were having issues,” but despite this continued to finance that customer’s continued trading before that dreaded insolvency notice landed on the doorstep.

So, why do we continue serving that customer?  It is probably that salesperson in all of us that does not wish to let anyone down.  Unfortunately, that salesmanship could result in you having difficulties.

As an example, I was appointed as administrator over a company.  On the face of it, the company was profitable.  It employed 55 people over two sites and had a full order book.  However, it had an increasing debt problem and some creditors, including HMRC, were getting more threatening.  The problem was its sales ledger was out of control.  There were no credit limits on customers and orders were accepted, regardless of how much was owed.  As administrator, I:

• Reviewed each customer and set credit limits for each one.
• Stuck to those credit limits with no exception.

On one occasion I took a call from “The largest customer” (as he wanted to remind me) who asked why I had rejected his latest order.  My reply was along the lines of, “You may be the largest customer, but you are not the best customer.  If you pay the older invoices it will bring you back within your limit.”  They paid and the order was subsequently fulfilled.  Another actually admitted to being in financial difficulty and I worked with them in order to achieve recovery.

I guess the outcome means everything and that company was sold five months later as a going concern with all creditors being paid in full, together with statutory interest and some £300,000 returned to the shareholders.  However, it could have been avoided had the directors been more prepared to manage customers and to say that little word (no) now and again.

That life-changing contract

The other area I hear quite often is the scenario where a SME has secured that “Life changing” contract with a big company.

While many can look back and say that really was a life changer, too many fall under the dictatorship of large businesses.  Previously agreed unit prices are revised (usually down) while the double-whammy is the large company also dictates when and how much the SME will be paid. Others such as those who worked for Carillion Plc found they are increasing their exposure while the contractual terms oblige them to continue working (with no guarantee of payment) or face potential claims for (say) unilateral breach of contract.

The Government press the late payment interest legislation but their stance is based upon vote winning legislation and not the hard reality of business where the larger corporations will simply ignore such demands with the threat you continue working under their preferred conditions or lose the contract entirely.

It is so easy to sit and write this but when a SME has that large corporation opportunity it can be like offering a starving person food.  It takes a brave person indeed to turn down such a business opportunity.

The Achilles heel always seems to centre around the terms of contract.  Large corporations will generally lay down their terms.  My advice would be to consult your solicitor and ensure there are safeguards for the SME in that contract.  Okay, that may be a deal breaker but what do you prefer, a contract that benefits both parties and encourages success or to sit in front of an insolvency practitioner telling a tale of woe as your business ceases to trade because it could not trade under the conditions imposed?  Is that really a tough choice?

Should you need further convincing just think of the 30,000 businesses and the £1.5 billion of unpaid debt Carillion has left in its wake.  One of those victims spoke to me and wondered how his business could survive losing the £800,000 Carillion owe.

Dispute

The wider issue caused by not controlling sales can be a dispute in management.  When cash becomes tight, all too often it is the directors who cut their cloth, stress intensifies and can lead to disagreement.  Am I being dramatic, here?  From instructions I have received the answer is most definitely no.

I will not dwell on this area.  Suffice to say, one I handled saw the two directors collectively spend £100,000 in legal costs, for a business worth £30,000.  I need say no more.

Conclusion

 In business, there is always an opportunity around the corner but, remember, that little word needs to be used when you have doubt or concern.  At the end of the day, it could save you a lot of stress and money.

Gary Pettit is a Licensed insolvency practitioner and accredited mediator who has worked in the insolvency field for over 33 years.  He is the Managing Director of PBC Business Recovery & Insolvency who are in Northampton and Bedford.

Professional advisors say Gary is pragmatic and empathises with the experiences clients are enduring.  He also has a proven ability to think outside of the box when considering solutions.

It was a barrister (now a High Court judge) who said Gary ought to be a mediator due to his calm persona and ability to resolve commercial or insolvency-related disputes.