Best of a bad situation

The Lunch Lesson takes a look at insolvency

When a business goes under, it's an unhappy time for all involved.

Ian Grant and the people who ran Just Tyres had bought the business from its previous owners.

They had hoped to make a go of it but it just didn't work.

Just trouble?

A company must watch for signs of trouble if it is to stay in business.

Just Tyres already had a burden when Ian Grant and his team took over. It had big debts.

These debts had to be paid back with interest.

This made it much harder for Just Tyres to be profitable.

Many successful companies have debt that needs to be repaid.

But the size of this debt and the cost of repaying it can provide a clue that a business may be heading for difficulties.

There are more:

Are sales falling? This is often the first clue to be seen - because it's hard to miss.

Are there new competitors?

Have competitors improved their product or service so your customers are disappearing?

Have they cut their price? Watching the marketplace is a must if you are to stay in business.

What's happening to the profit margin?

If the amount of profit that is earned, when all the costs have been covered, is falling, a business must look at its costs very carefully.

A reducing profit margin means that the company has less to spend on developing the business.

This can make it harder to climb out of trouble.

What about the return on capital?

Businesses can have a lot of money tied up in buildings and equipment.

This all has to earn its keep. If it is being used effectively, the return on capital employed will be high.

If it starts to slip, there may be problems ahead.

Just think...

Keep an eye on the news. What businesses are in difficulties at the moment? Why?

What is likely to be happening to sales, profit margin and return on capital employed? Why?

Just surviving?

Having spotted trouble on the horizon, what can a business do about it?

Just Tyres' difficulty was that it could not afford to make the cuts it knew were necessary.

If you employ people you can't just sack them.

You have to make them redundant and pay them some money depending on how long they have worked for you.

If you rent a building, like a tyre workshop, you can't just walk away and stop paying the rent.

You will have signed a lease which commits you to pay the rent for a certain period of time.

Even if you stop trading, you still have to pay this rent.

Many businesses have these difficulties.

Turning things around

What can they do to turn things around?

Cut costs.

Improve quality.

Change the product to meet customer tastes.

A business that is in trouble can find it hard to make these changes.

They often cost money and there may be little cash left in the kitty.

It may be too late. An efficient business must watch what's happening all the time - not just when it spots trouble.

Takeover

A business that has hit a rocky patch may find itself being bought up by another business.

Takeovers are a common way out.

Sometimes the people who run the business are happy to sell.

Sometimes the takeover can be hostile. The shareholders in the business may be made an offer that they cannot refuse.

If the business is in difficulties, shareholders may be pleased to have a new management.

The money they have put into the company may earn a better return under new direction.

Just think...

What are the businesses that you have identified trying to do about their problems?

Going, going, gone

Just Tyres tried everything but they couldn't survive.

They couldn't borrow any more money.

The bank had already lent as much as it would.

There was little chance of increasing sales in the existing business.

They simply couldn't pay the bills. The business was insolvent.

The receiver had to be called in to deal with the company.

The receiver is often an accountant who specialises in this work.

The task is to ensure the repayment of as much of the company's debts as possible.

This may mean selling the business, or part of it, as a going concern.

This will often raise more than selling off the equipment and other assets of the company.

Even when a company has gone bust - you may still see the name about.

The original business will have gone into receivership, been sold as a going concern and continues to trade under the same name.

The business is the same, it is just run by different people.