Presentation by UK top 20 accountancy firm Wilkins Kennedy, October 2012. How to spot the early warning signs that a business is in financial trouble and the options available to improve the situation.

1. Wilkins Kennedy LLP
Early warning signs that a company is in
financial difficulties and options to improve
the situation
3 October 2012

2. Next 20 minutes
• Cash flow
• Creditors
• Debtors
• Management
• Outsourcing
• PAYE/VAT
• Legal actions

3. Cash Flow
• Overdraft is always at the limit
• Returned cheques
• Banks refusing to provide a loan
• Bank has asked for facilities to be reduced
• Bank wants to introduce investigating accountants
• Bank asks for increased security
• Bank wants personal guarantees
• Bank is looking for breach of covenants
• Invoice discounting/factoring
• Refinance assets
• Stock financing
• Equity or debt for equity

4. Balance Sheets
Company Company Company Company
A B C D
Fixed assets
Property 1,000,000 1,000,000
Plant & equipment 50,000 10,000 10,000 10,000
Motor vehicles 30,000 15,000 15,000 15,000
80,000 25,000 1,025,000 1,025,000
Current assets
Stock & WIP 40,000 10,000 40,000 100,000
Debtors 85,000 10,000 50,000 300,000
Cash at bank 10,000 90,000 25,000 100,000
135,000 110,000 115,000 500,000
Current liablilities
Trade creditors/HMRCE 105,000 25,000 50,000 1,300,000
Taxation 20,000 20,000 20,000 20,000
Directors loans 180,000 115,000
Bank overdraft
125,000 45,000 250,000 1,435,000
Creditors due after 1 year 800,000
Net assets 90,000 90,000 90,000 90,000
Share capital 10,000 10,000 10,000 10,000
Retained profits 80,000 80,000 80,000 80,000
90,000 90,000 90,000 90,000

5. Cash Flow - 1
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total P&L a/c Balance sheet
Dr Cr Dr Cr
Sales invoices net 100,000 150,000 200,000 100,000 150,000 200,000 100,000 150,000 200,000 100,000 150,000 200,000 1,800,000 Sales 1,800,000
VAT 20,000 30,000 40,000 20,000 30,000 40,000 20,000 30,000 40,000 20,000 30,000 40,000 360,000 Purchases 900,000
Gross sales invoices 120,000 180,000 240,000 120,000 180,000 240,000 120,000 180,000 240,000 120,000 180,000 240,000 2,160,000
Wages 660,000
Cash received 120,000 180,000 240,000 120,000 180,000 240,000 120,000 180,000 240,000 120,000 180,000 1,920,000 Overheads 140,000
Purchase invoices net 50,000 75,000 100,000 50,000 75,000 100,000 50,000 75,000 100,000 50,000 75,000 100,000 900,000
VAT 10,000 15,000 20,000 10,000 15,000 20,000 10,000 15,000 20,000 10,000 15,000 20,000 180,000
Gross purchase invoices 60,000 90,000 120,000 60,000 90,000 120,000 60,000 90,000 120,000 60,000 90,000 120,000 1,080,000
Debtors 240,000
Cash paid 60,000 90,000 120,000 60,000 90,000 120,000 60,000 90,000 120,000 60,000 90,000 960,000 Creditors 120,000
VAT 37,700
Gross profit 50,000 75,000 100,000 50,000 75,000 100,000 50,000 75,000 100,000 50,000 75,000 100,000 900,000 Bank account 17,700
1,700,000 1,800,000 257,700 157,700
Wages 55,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000 660,000
Overheads 11,000 11,500 12,000 11,000 11,500 12,000 11,000 11,500 12,000 11,000 11,500 14,000 140,000 Profit 100,000 100,000
VAT on overheads 2,200 2,300 2,400 2,200 2,300 2,400 2,200 2,300 2,400 2,200 2,300 2,800 28,000 1,800,000 1,800,000 257,700 257,700
VAT payments 38,100 38,100 38,100 114,300
Net profit (16,000) 8,500 33,000 (16,000) 8,500 33,000 (16,000) 8,500 33,000 (16,000) 8,500 31,000 100,000
Operating profit 100,000
Cashflow Increase in debtors (240,000)
Opening balance (68,200) (77,000) (56,400) (42,700) (51,500) (30,900) (17,200) (26,000) (5,400) 8,300 (500) 0 Increase in creditors 157,700
Cash in 0 120,000 180,000 240,000 120,000 180,000 240,000 120,000 180,000 240,000 120,000 180,000 1,920,000 Net cash inflow 17,700
Cash out 68,200 128,800 159,400 226,300 128,800 159,400 226,300 128,800 159,400 226,300 128,800 161,800 1,902,300
Closing balance (68,200) (77,000) (56,400) (42,700) (51,500) (30,900) (17,200) (26,000) (5,400) 8,300 (500) 17,700 17,700

6. Cash Flow - 2
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total P&L a/c Balance sheet
Dr Cr Dr Cr
Sales invoices net 100,000 150,000 200,000 100,000 150,000 200,000 100,000 150,000 200,000 100,000 150,000 200,000 1,800,000 Sales 1,800,000
VAT 20,000 30,000 40,000 20,000 30,000 40,000 20,000 30,000 40,000 20,000 30,000 40,000 360,000 Purchases 900,000
Gross sales invoices 120,000 180,000 240,000 120,000 180,000 240,000 120,000 180,000 240,000 120,000 180,000 240,000 2,160,000
Wages 660,000
Cash received 120,000 180,000 240,000 120,000 180,000 240,000 120,000 180,000 240,000 120,000 1,740,000 Overheads 140,000
Purchase invoices net 50,000 75,000 100,000 50,000 75,000 100,000 50,000 75,000 100,000 50,000 75,000 100,000 900,000
VAT 10,000 15,000 20,000 10,000 15,000 20,000 10,000 15,000 20,000 10,000 15,000 20,000 180,000
Gross purchase invoices 60,000 90,000 120,000 60,000 90,000 120,000 60,000 90,000 120,000 60,000 90,000 120,000 1,080,000
Debtors 420,000
Cash paid 60,000 90,000 120,000 60,000 90,000 120,000 60,000 90,000 120,000 60,000 90,000 960,000 Creditors 120,000
VAT 37,700
Gross profit 50,000 75,000 100,000 50,000 75,000 100,000 50,000 75,000 100,000 50,000 75,000 100,000 900,000 Bank account (162,300)
1,700,000 1,800,000 257,700 157,700
Wages 55,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000 660,000
Overheads 11,000 11,500 12,000 11,000 11,500 12,000 11,000 11,500 12,000 11,000 11,500 14,000 140,000 Profit 100,000 100,000
VAT on overheads 2,200 2,300 2,400 2,200 2,300 2,400 2,200 2,300 2,400 2,200 2,300 2,800 28,000 1,800,000 1,800,000 257,700 257,700
VAT payments 38,100 38,100 38,100 114,300
Net profit (16,000) 8,500 33,000 (16,000) 8,500 33,000 (16,000) 8,500 33,000 (16,000) 8,500 31,000 100,000
Operating profit 100,000
Cashflow Increase in debtors (420,000)
Opening balance (68,200) (197,000) (236,400) (282,700) (171,500) (210,900) (257,200) (146,000) (185,400) (231,700) (120,500) 0 Increase in creditors 157,700
Cash in 0 0 120,000 180,000 240,000 120,000 180,000 240,000 120,000 180,000 240,000 120,000 1,740,000 Net cash inflow (162,300)
Cash out 68,200 128,800 159,400 226,300 128,800 159,400 226,300 128,800 159,400 226,300 128,800 161,800 1,902,300
Closing balance (68,200) (197,000) (236,400) (282,700) (171,500) (210,900) (257,200) (146,000) (185,400) (231,700) (120,500) (162,300) (162,300)

7. Cash Flow - 3
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total P&L a/c Balance sheet
Dr Cr Dr Cr
Sales invoices net 100,000 150,000 200,000 100,000 150,000 200,000 100,000 150,000 200,000 100,000 150,000 200,000 1,800,000 Sales 1,800,000
VAT 20,000 30,000 40,000 20,000 30,000 40,000 20,000 30,000 40,000 20,000 30,000 40,000 360,000 Purchases 900,000
Gross sales invoices 120,000 180,000 240,000 120,000 180,000 240,000 120,000 180,000 240,000 120,000 180,000 240,000 2,160,000
Wages 660,000
Cash received 120,000 180,000 240,000 120,000 180,000 240,000 120,000 180,000 240,000 120,000 180,000 240,000 2,160,000 Overheads 140,000
Purchase invoices net 50,000 75,000 100,000 50,000 75,000 100,000 50,000 75,000 100,000 50,000 75,000 100,000 900,000
VAT 10,000 15,000 20,000 10,000 15,000 20,000 10,000 15,000 20,000 10,000 15,000 20,000 180,000
Gross purchase invoices 60,000 90,000 120,000 60,000 90,000 120,000 60,000 90,000 120,000 60,000 90,000 120,000 1,080,000
Debtors 0
Cash paid 60,000 90,000 120,000 60,000 90,000 120,000 60,000 90,000 120,000 60,000 90,000 960,000 Creditors 120,000
VAT 37,700
Gross profit 50,000 75,000 100,000 50,000 75,000 100,000 50,000 75,000 100,000 50,000 75,000 100,000 900,000 Bank account 257,700
1,700,000 1,800,000 257,700 157,700
Wages 55,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000 660,000
Overheads 11,000 11,500 12,000 11,000 11,500 12,000 11,000 11,500 12,000 11,000 11,500 14,000 140,000 Profit 100,000 100,000
VAT on overheads 2,200 2,300 2,400 2,200 2,300 2,400 2,200 2,300 2,400 2,200 2,300 2,800 28,000 1,800,000 1,800,000 257,700 257,700
VAT payments 38,100 38,100 38,100 114,300
Net profit (16,000) 8,500 33,000 (16,000) 8,500 33,000 (16,000) 8,500 33,000 (16,000) 8,500 31,000 100,000
Operating profit 100,000
Cashflow Increase in debtors 0
Opening balance 51,800 103,000 183,600 77,300 128,500 209,100 102,800 154,000 234,600 128,300 179,500 0 Increase in creditors 157,700
Cash in 120,000 180,000 240,000 120,000 180,000 240,000 120,000 180,000 240,000 120,000 180,000 240,000 2,160,000 Net cash inflow 257,700
Cash out 68,200 128,800 159,400 226,300 128,800 159,400 226,300 128,800 159,400 226,300 128,800 161,800 1,902,300
Closing balance 51,800 103,000 183,600 77,300 128,500 209,100 102,800 154,000 234,600 128,300 179,500 257,700 257,700

8. Creditors
• Problems
• Cash flow always tight so paying creditors is difficult - constant creditor pressure
• Can’t get stock on time because missed deadlines for payment of supplier accounts
• Cannot get new credit
• Cannot extend existing credit
• Company’s creditor days growing
• Solutions
• Communicate with creditors
• Make arrangement with creditors
• Consider CVA or administration if necessary
• Offer security or debt for equity

9. Debtors
• Problems
• Debtors are taking longer to pay
• Businesses invoice too slowly
• Debtor days are allowed to increase
• High concentration in 1 or 2 debtors making business vulnerable
• Debtor collection function too weak
• Lots of old debts
• Solutions
• Factor/invoice discount/outsourcing
• Invoice more frequently
• Better credit checks on new customers
• Credit insurance

10. Management
• Problems
• Don’t have a business plan
• Don’t have a cashflow model
• Don’t have regular management/board meetings
• Are taking big salaries and expenses
• Solutions
• Bring in interim manager
• Part time directors/non-execs
• More input from accountants
• Business improvement facilitation
• Review staffing levels and cost base
• Consider a waste audit

11. Management don’t know
• Problems
• Gross Profit - accurately
• Costs - accurately
• Sales
• Bank balances
• Where 80% of work comes from
• Where 80% of profit comes from
• Key statistics of the business
• Break even point
• Solutions
• Install a good management information system
• Obtain good staff either internally or outsource

12. Outsourcing
Benefits
• Save money but not most important reason
• Converts fixed costs to variable costs
• Reduces initial capital commitment to free capital to spend elsewhere
• As a result improves competitive advantage
• Hiring and training staff is expensive, holiday pay, sickness pay, managing staff uses
management time
• Flexible - grows or shrinks with demand
• Focus on core business - all businesses have limited resources
• Can enable small firms to act big
• Reduces risk - third party responsible for keeping abreast of legislation changes
• Scope of resources e.g. VAT, employment legislation
• Strategic v operational

13. PAYE
• Not paying deductions on 19th of the month following
• Not filed monthly returns or paid the tax deducted
• Have had penalties
• Have entered into deals with the Revenue

14. VAT
• Not filing returns or paying tax on time
• Had surcharges
• Doing deals over time with the local VAT office

15. Legal Actions
• County Court Summons – CCS’s
• County Court Judgements – CCJ’s
• Walking possession
• Statutory demand
• Winding up petition
• What to do

16. Contact Details
Stephen Grant on 01494 545570 or email
stephen.grant@wilkinskennedy.com
Vee Bharakda on 01494 545570 or email
vee.bharakda@wilkinskennedy.com
Wilkins Kennedy LLP
Anglo House
Bell Lane Office Village
Bell Lane, Amersham
Bucks, HP6 6FA