In the last number of months we are seeing more and more discussion by government and financial commentators regarding economic uncertainty, financial pressures and looming corporate insolvencies in Ireland.
To quote comments made by Quintas’ managing partner Paul O’Connell in Quintas’ summer newsletter:
'Undoubtedly, the big news story of the year so far has been the war in Ukraine and the resulting impact on the economy through supply issues and inflationary pressures, neither of which show any signs of easing.
Irish businesses are being impacted in so many ways, with supply issues, rising costs and labour shortages high on our discussion agenda with clients. Business owners have been forced to react swiftly and decisively to tackle these issues and it has been encouraging to see so many of our clients embrace the need for change.'
To add to what is presenting as a challenging time for companies, many are facing the additional challenge of having to pay legacy debts which have been carried throughout the COVID-19 pandemic and which are now beginning to be called in. The most noteworthy of these is the Debt Warehousing Scheme implemented by Revenue during the pandemic which provided nearly 105,000 businesses the ability to place over €3 billion tax debt on hold. For most companies this warehoused debt will fall due for payment on 1 January 2023.
The Corporate Insolvency team at Quintas is focused on working with companies to save their businesses. We cannot emphasise enough the importance that companies take a proactive approach and address financial difficulty as early as possible, as it is these companies we regularly see succeed at turning around their businesses.
Early Warning Signs
In light of the challenging environment we want to introduce companies to a number of early warning signs to look out for. These early warning signs are simple to identify and provide a basis for early proactive discussion to address difficulties being faced by companies.
- Unpaid Revenue Debt
This is one of the earliest warning signs a company will demonstrate.
Company’s experiencing financial difficulty continue to pay their staff and suppliers as they see these as essential to continuing to trade their business and then defer payments to Revenue in the hope of catching up at a later date
It is important a company has the capacity to pay all of its tax debts as they fall due. , Ensuring that Revenue are kept up to date is critical due to the extensive powers they hold to enforce recovery of tax debts (e.g. Withdrawal of Tax Clearance and Notice of Attachments) and the impact this can have on a company’s business.
- Declining profits
More than ever, 2022 is a year where companies’ profitability is at risk due to inflationary pressures such as increases in product and staffing costs and supply chain issues adding expense, many of which cannot readily be passed onto the customer.
It is important companies address declining profits early to ensure their continued viability. Companies regularly don’t acknowledge profitability issues until losses start appearing in their annual accounts. This is a major issue as at this point significant business value has been eroded and significant debts have been built up, which may limit a company’s options to achieve a turnaround.
- Bank Facilities reaching limits
Companies operating bank facilities such as overdraft, trade finance or invoice discounting facilities should be mindful of the facility limits.
If a company is regularly reaching the limits of its facilities this highlights a cash flow issue in the business which somewhat ironically is commonly the reason companies took up these facilities in the first place. Using a bank account as a measurement tool for operating a business can be a fatal error.
- Personal Funds being used to prop up the company
Too often we are approached by directors of failed companies who have spent months or even years propping up the company with their own money and as a result have lost everything. We have seen directors stop taking a wage from the company, deplete their entire life savings or draw down on the equity in their family home to try and keep the company afloat.
It is important Directors acknowledge there comes a point in a company’s life where it should stand on its own two feet and using personal funds to prop up the company is generally only a band aid and it is not something that addresses the true difficulties within the company.
- Creditor Aging Increasing
If a company’s creditors or accounts payable aging continues to grow (e.g. the percentage of creditors aged beyond 30, 60 or 90 days is increasing month on month) this is a hallmark indicator of cash flow issues and possible insolvency.
- Poor Financial Records
Without good financial records a company’s performance and financial position cannot be understood and management is not able to make informed decisions in the best interest of the company.
Examples of poor financial records may start with basic items like bank reconciliations consistently being attended to late or stock levels not being maintained accurately. At a minimum the company must be able to produce monthly management accounts on a timely basis that reflect the true financial position of the company.
- Refinance application being rejected
If financial institutions or alternative financiers reject an application to refinance debt this indicates they clearly see a high risk of default as they do not see viability in the company. This may be due to the company’s inability to provide sufficient collateral as security or the company’s inability to meet the minimum repayments proposed under the refinance. Whatever the reasons for rejecting the application, this is a clear sign that the company is experiencing financial difficulty.
Financiers conduct thorough due diligence to assess a company and the risk to them in lending, so a rejection should not be ignored. Add to this, a failure to obtain a refinance means a debt or facility will likely soon fall due for payment which may cause the company to become insolvent.
- High staff turnover
Companies experiencing financial difficulties will have a higher than usual staff turnover. This is generally the result of significant stress, deferred payment of wages and resulting dissatisfaction of key staff in a company.
Whilst the early warning signs discussed here are in no way exhaustive, we believe many of these are the most common encountered by companies.
We encourage directors and management to look out for these early warning signs and if identified complete a detailed review of the company’s financial position and begin discussions about how the company can resolve the difficulties identified.
Should you have any questions about early warning signs or may be considering engaging experts to assist in turning around your company please contact us on 021 464 1400 or by email at email@example.com.
Article written by Michael Jeston, Quintas Corporate Insolvency Practitioner.