FDs must smash emergency glass and call for help sooner

THE INSOLVENCY SERVICE statistics for the second quarter in the UK show a small decrease on the number of compulsory liquidations and creditors’ voluntary liquidations. The numbers are down 3.6% on the previous quarter and 2.4% less on the same quarter of last year. However, other corporate insolvencies, such as receivership, administration and company voluntary arrangements, were up by 6.3% on the same period a year ago. Combine that with the latest economic figures: a 0.7 per cent fall in gross domestic product, disappointing retail sales and a further fall in property prices, all of which indicate that the pain is not over for many businesses.

Indeed, according to the latest PwC survey, insolvency figures for the retail industry are up by 10.3% in the second quarter of 2012, compared with the same quarter a year ago. This is despite the Jubilee celebrations and Olympics providing a sticking plaster for the next quarter’s growth figures, and a further slowdown in the underlying economy could result in an increase in the number of companies becoming insolvent in the latter part of the year.

This is bad, but also incredibly frustrating news. A very high percentage of businesses that enter administration proceedings would have had a reasonable chance of a successful turn-around, if the finance director, or senior accounting personnel, had called for help with their financial problems as little as six months earlier.

So why don’t they do it?

Part of the reason is that there is a stigma attached to bringing in professional help to rescue companies that are struggling and failing. But businesses don’t feel embarrassed when they have to appoint a lawyer to handle a legal problem, or a management consultant to handle business process issues. There is no reason why finance directors and accountants in business should feel embarrassed or ashamed about speaking to a corporate recovery specialist when the external pressures on a business, such as the eurozone crisis depressing the order books, the banking crisis blocking access to lending, or the recession putting the brakes on consumer spending, are disastrously damaging the company’s trading prospects.

The other reason why finance directors and business managers don’t ask for help is that they are frequently in denial. Faced with the overwhelming evidence that a business is on the slippery downward slope towards insolvency, many directors will make like an ostrich and bury their heads in the sand.

Very often, finance directors are unable to accept that the financial problems have got away from them and they are unable to manage. This is a psychological rather than logical reaction and is particularly common in family-owned businesses where there is pressure on the existing management not to be the generation that lets the side down. Frequently, family business-owners also resist relinquishing control to non-family members.

Once a FDs has started on the path of refusing to recognise help is needed, it becomes more and more difficult to admit that things are beyond their control and they need help.

This denial mindset is not a UK-only phenomenon. Even in Germany, where there are very strict liability laws and personal criminal repercussions for managers that fail to report their suspicions that a company is on the path to failure (more severe than the rules governing UK directors, who must not allow a business to trade if they know it is insolvent), FDs still pursue the path of business failure, rather than break the emergency glass and call in a turn-around expert.

Clear signs that the blinkers are on and that businesses are failing to deal with their financial problems include: consistent late payments; plugging holes by borrowing from Peter to pay Paul; and a stream of increasingly implausible excuses to put off suppliers and customers.

It is vital we combat this mindset. If the majority of businesses which become insolvent could be turned around with early intervention, there is a clear imperative to change this culture. Breaking this denial mindset is the most important thing that finance directors can do to save their companies.

Frank Tschentscher is a senior director at law firm Schultze & Braun