EARLIER THIS YEAR accountancy trade body, R3, launched a campaign against suppliers who raise prices or stop serving companies that have fallen into insolvent administration. R3 estimates that an extra 2,000 companies a year could be saved from being wound up if creditors, namely utility companies, didn’t demand these ‘ransom payments’.
Utility companies are notorious for being credit risk averse and usually withdraw competitive market rates for companies that have fallen into administration, making it harder for the administrator to find a potential buyer.
These ‘ransom payments’ may be one reason for an increase in pre-packed administrations, because insolvency practitioners fear that suppliers will take unreasonable action during the insolvency process, putting off potential buyers.
This, coupled with the already rising costs of energy and water, does not bode well for administrators looking to save costs and present a viable proposition to prospective buyers.
R3’s campaign to stop this practice is still ongoing. The government has announced it will consider the case for updating section 233 of the Insolvency Act 1986 and the wider issue of termination clauses. In the meantime, insolvency practitioners must look for ways to challenge those heavyweight suppliers.
Ask an expert
As the billing and negotiations can both be complex, insolvency practitioners could look to appoint a specialist company with the relevant experience, on a “no-win, no-fee” basis, to focus on recouping and reducing utility costs. As most consultants work on a contingency basis, there is usually no net cost to the client for the service.
Independent utility consultants have built up years of experience in dealing with utility suppliers and managing bills. Aside from having existing relationships with the suppliers, utility consultants will also understand the technical jargon often used to confound clients.
By analysing bills and correspondence, they can determine if a supplier is being unfair and pinpoint what a fairer tariff should be. They will use their expert knowledge of market rates and supplier procedures to guarantee that companies in administration are offered more competitive market rates.
As well as ensuring companies that have slipped into administration don’t suffer because of ransom payments, utility consultants can suggest ways to reduce utility consumption and costs.
Don’t assume bills are correct
Electricity and water bills can be quite complex. The result is that mistakes, inaccuracies and energy wastage occur, with the net result that businesses pay too much for supplies. At BCC, we estimate that around 80% of businesses throughout the UK are paying too much for their electricity, gas and water. This can be quite significant, given that utility costs, on average, account for between 5% and 10% of most businesses annual budgets. As such, all bills (present and historic) should be thoroughly checked and any overcharges recouped.
Until you know how much energy and water you use, you can’t measure savings. One of the best ways to monitor energy and water consumption is through smart meters or smart data loggers, which transmit half-hourly data to a central computer. By April 2014, smart metering will be mandatory for sites with an electricity profile class of 5-8 (larger electricity consumers) and sites with a gas consumption of between 732MWh and 58,600MWh per annum. Many businesses with larger supplies will already have a half-hourly meter, but aren’t making full use of the data.
Analysis of the data will not only ensure that businesses are being billed correctly, but can highlight if equipment is left on overnight or if thermostat settings are wrong. Also gas and water leaks can often go undetected for long periods resulting in large bills at the end of a month, or a quarter. Some smart meters and data loggers can be programmed to automatically spot such anomalies and immediately alert the user by SMS or email.
If you are not confident about how to use the data from such devices, you can call an expert. Not only will they be able to interpret and deduce useful information from the data, they will be able to send experts to your sites to look for potential savings in energy and water consumption. Real savings of more than 25% are not uncommon.
Over the years, we have been working closely with organisations including BDO LLP, Begbies Traynor, KPMG and RSM Tenon to challenge large utility companies. Recently, we achieved savings of more than £300,000 for BDO LLP which was appointed as administrator for a large multi-site, UK-based hotel chain. That involved achieving large rebates and significantly reducing the cost of energy for the organisation, while it was in administration. Our fees were paid out of the savings we achieved.
Just because a business goes into formal insolvency it doesn’t mean it has to close. We have relationships with the large suppliers and understand the reasons behind demanding ransom payments. However, this behaviour can put enormous pressure on a struggling company’s finances at a critical time – money that could be used to rescue the company.
Donald Maclean is managing director of Business Cost Consultants (BCC)
• For more information on R3’s campaign see www.rescuetoransom.org/campaign-news/
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