This week in the newsletter we featured an article on the Top 10 warning signs that your recruitment business is in trouble.
Here, from Keith Steven of KSA Group Ltd, is the essential follow up of how to turn around your recruitment business.
Things can go wrong in any type of business whether it’s a drop in sales, a loss of large contracts or a falling out within management. Recruitment companies, however, are already off to a good start as the business itself has economic value and engages the public (plus there is no stock to lose!). Recruitment agencies and companies have grown over the years, especially after the recession, as more and more people have found themselves facing redundancy and re-evaluating their career.
Because of the nature of the business, some companies have expanded to become high fliers while others have failed to stay afloat. Of course, the recession also contributed to a shrinking demand for candidates as employers couldn’t afford to take on new staff.
Why and how can a recruitment business become insolvent?
There are a number of reasons why a company can financially struggle and in every case, it’s always best to face the issue head on and either find a solution or be prepared for what happens next. As insolvency practitioners, we tend to see the following issues faced by recruitment companies:
– Having to cut costs in order to keep clients interested
– Clients cancelling long-term contracts
– Falling sales and contracts
– Overdrawn directors’ current accounts
– Debtors are delaying payments
– Missed PAYE or tax payments
– Clients imposing hiring bans
– Ineffective recruitment consultants
As companies expand and grow, it can be challenging to handle everything that comes with the process. Companies have been known to run out of money because they end up owing huge debts to HMRC. Regardless of the economic situation, the main reason for businesses failing is the lack of financial planning, for example insufficient cashflow management. To avoid missed payments and PAYE problems, ensure you use have a daily cashflow model and keep the accounts regularly updated.
If you can see trouble ahead, act quickly and review, re-evaluate and restructure your business, cutting costs along the way, if necessary.
Is your company insolvent?
Sometimes you can have financial problems without the company being insolvent, but it’s important to review the business if you’re worried it might be.
There are three main things to look out for:
– Is your business unable to pay creditors VAT and PAYE on time?
– Is the debt greater than the business’s assets and value?
– Are there any outstanding legal actions against your company (e.g. winding up petition, county court judgements)?
If a company does become insolvent, it’s not the end of the road, but you must now act to maximise creditors’ interests. In by doing so, there are still ways to turn the business around and stop it from going bust.
It’s not too late!
Usually the biggest creditor for recruitment companies is HMRC. If you are falling behind on payments, you can apply for a Time To Pay (TTP) arrangement whereby you pay back the debt in instalments over a number of months (up to a year) rather than in just one lump sum. Try and negotiate a realistic timeframe so you can ensure you make repayments to HMRC on time. Otherwise you’ll end up in a poorer position than where you started.
If the debt is too big and you’re unable to pay it off, it’s worth considering a Company Voluntary Arrangement (CVA). This is essentially a deal made with creditors, which allows you to pay back most, if not all, of the debt over a few years. Creditors may receive nothing if the business goes into administration or liquidation, therefore a CVA can be benefit creditors. Unlike administration, a CVA lets you, as a director, stay in control and the company can continue its business.
It may be worth imposing an informal deal known as Plan A, which is similar to a CVA, but it is not legally binding (however, note that in an informal deal, debt can’t be written off). If one of the creditors breaks ranks though then the business can instigate plan B quite quickly which is a CVA (which is legally binding).
If aggressive creditors are threatening legal actions or there is interest in the business from buyers, the best option could be administration. This will protect the company during the process and the business can be quickly sold off to a new buyer in order to continue. On the downside, this might disrupt working relationships and creditors may be reluctant to support the business. If there is no buyer, the administrator, appointed by the Bank or High Court, will make the final decision on the business’s future.
These are all possible options to consider if your recruitment business is suffering financial difficulty. If you fear the company is going down a slippery slope, act now and you may be able to save it before it’s too late.
Keith Steven of KSA Group Ltd has been rescuing and turning around companies since 1994; he has worked for insolvency firms, turnaround funds and venture capital investors. Keith is acknowledged as an expert in the delivery of CVAs for SME companies faced with financial difficulties and is the author of the site www.companyrescue.co.uk. Downloadable from this site is a 99 page guide on how to turnaround your recruitment company.
