Derek Cooper

Company debt restructure to improve cash flow

Ensuring that enough cash is available to maintain their business must be a priority for companies. Those that do it well will survive. Those that do not are likely to fall. As such identifying problems and implement solutions which may require a radical restructuring of debt must be a priority. We discuss some of the solutions available.

Without sufficient cash, your business will fail. If your access to additional investment is limited, alternative options to save your business must be sought quickly.

The old saying, revenue is vanity, profit is sanity and cash is king has never been truer than when businesses are fighting for survival during and after a recession.

Statistics are now showing a return to economic growth. However, the reality for many companies is that they will continue to face depressed demand and a reduction in sales prices while battling with extended payment terms and bed debts.

In this environment, a full order book will be irrelevant if the business runs out of cash.

Raising cash by refinancing or borrowing is often impossible

The most obvious way to increase the availability of cash in a business is to consider borrowing or refinancing.

Asset refinancing schemes are around. The difficulty with these is that they require the business to own valuable assets which can be put up as security against a loan.

Given the difficulties of raising additional or new cash, companies must consider alternative methods to preserve the cash they have.

Company debt restructure to release cash

A radical restructuring of the company debt to preserve cash and reduce monthly outgoings may be required if the company is at risk of failure. There are two main options to consider.

1. Company Voluntary Arrangement or CVA
   

   A CVA enables the company's monthly debt payments to be reduced ensuring cash is freed up to allow the ongoing trading of the business. The arrangement usually results in debt being written off allowing the company to trade into the future.

2. Pre Pack Administration or phoenixing
   

   A pre pack allows a new company to purchase the assets of the old and start to trade without the burden of any legacy debt, the old company usually being liquidated. A pre pack can give a company the best chance of survival where debt is pushing it towards failure.

These options raise the question aren't business debt solutions simply passing the problem around?

The argument against solutions such as Company Voluntary Arrangement and Pre Pack Administration is that the creditors lose out and the business just dodges its debts.

This is true, however, it must be considered in the light of the alternative - the total failure of a struggling business. The closure of the struggling company would almost certainly result in unsecured creditors receiving no return, cause staff to be made redundant and give no opportunity for trade in the future.

A CVA or pre pack administration at least offers some return and the opportunity for the business to remain trading.

Cash has to be king and top priority for many companies in 2010 and 2011. Those that do it well will survive. Those that do not are likely to fall.

As such identifying problems and implement solutions which may require a radical restructuring of debt must be a priority.

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