Do you investigate everything you really need to when a prospective customer approaches you?

This is an unusual question for anyone to ask, after all we are all grateful when a potential new customer approaches us.  So why am I asking this question now?

Many businesses are going through a period of massive change… old style business models are being replaced by what appear to be leaner, faster moving, sometimes digitised models that involve using the services of people and companies you’ve not used before.  Companies are outsourcing more, they are sending goods and services out for external processing by specialists, before sometimes getting them back for further processing – in the past companies often tried to do everything in-house, now it is generally recognised that doing so is a massive mistake, no company whatever its size can hope to have all the skills and resources to keep all aspects of their operations at the cutting edge in an increasingly complex and fast moving world.  We are all being asked to do more work by companies we have never heard of before.  So what’s the problem?

The problem there is no past history of working with that company, and increasingly I’m seeing companies – particularly engineering companies – who are outsourcing to specialists, closing down some or all of their own departments.  And that brings massive risk to the company that accept such work… especially as I have seen several times in recent weeks those companies looking to outsource appear to be very close to insolvency and are merely supplier hopping, leaving a trail of unpaid debts behind them which, if you accept such work, would put the very existence of your business at risk.

So here are a few questions for you to ask / things for you to do before you take on a new customer / client:

  1. Why is the customer looking to use your services / outsource? Really dig down deep on this…is it for valid reasons that should stand the test of time or is it merely an effort to stave off cash flow problems, to get you to do work for which you will struggle to get paid?
  2. Why you?  Why not someone else?  What’s so special about you?  Is it merely because they see you as a easy touch because you need more work?  Or is it because you and you alone have the skills they really need?
  3. Why have they closed down their own department who used to do the work you are being asked to do?  Was it because they lost or made redundant the staff in that department (if so, why?), was it because they couldn’t properly manage the department or manage or control the work flowing through it? (in small industries or in a small area like the Black Country it may be possible to ask former staff for the real reasons, don’t be afraid to seek them out, either using your contacts or even social media).  Same for any previous supplier of such services, do you know who they are, can you speak to them?
  4. What do you know about the prospective new customer’s contract with its customer?  Does it enable such outsourcing?  (I’m seeing instances where work is being passed out where the contract specifically prohibits doing so – this is a very real warning not to get involved because the ultimate customer as and when they find out will not pay, and that means you will probably not be paid either, they will argue that the reason they are not getting paid is your fault).
  5. What do you know about the customer’s history and its finances and its directors’ / senior management’s history?  Do in-depth searches on them.  Not just cursory credit searches.  Do they habitually leave a trail of subcontractor destruction, liquidations or administrations behind them?  Are their finances strong, or not?  – And actually look behind the figures, don’t take them on face value – I’m seeing groups who have recently liquidated subsidiary or associated companies in order to jettison large levels of external debts (this could be you next time they do this!), where their failures will have a massive knock on effect on the remaining group companies which are not reflected in the  accounts or credit ratings – they have delayed filing their current accounts  to hide their true financial position.  Who are the customer’s external accountants / auditors – are they reputable or could they be working closely with their client to orchestrate the eventual failure and rebirth of the business (after writing your debt off)? – again, I’m seeing evidence of this…
  6. What’s the rumour mill saying about them?  Are there any murmurs of under-pricing, suppliers not being paid on time, fabrication of reasons not to pay, non-deliveries, resignations, sudden changes in staff/suppliers, etc?
  7. Who can you talk to whom you can trust, if anyone, to satisfy yourself as to the customer’s motives and reliability?  If they have been involved in any recent failures, pull down the statement of affairs, talk to the suppliers you know who have been left behind.  Think about others – customers, employees, advisers.  If there is no one you can talk to, then you might think about not accepting the work.
  8. Think about what’s the worst that can happen?  Then budget for it because there is a good chance it will happen… would it take down your business or be something that you can simply put down to experience?  What ‘hold’ if any do you have over the customer os its directors once you have started to do your work?  Should you be asking for a personal guarantee from the customer’s directors?

Right now I am seeing good businesses being put at massive risk by unscrupulous companies – yes, as much as it hurts me to say it, by Black Country businesses – who appear to be following the Carillion example of massive subcontractor abuse.  Make sure it’s not you who suffers as a result… and if you are an accountant or lawyer whose client has been asked to take on a big contract which might hurt them if they’re not paid, why not ask me for my thoughts? – it might just be the difference between you losing a client or your client going under themselves, or not.

Credit Unions – it’s far from good news, in fact it’s awful!

I don’t know if you saw the news today?  – How the UK’s credit union assets hit £3 billion for the first time ever?  – click here to see the news from ABCUL

Great news, eh?

Well no…

Why?

Well, today, yes the very same day that ABCUL announced this ‘great news’ about assets, a letter hit my desk from the Co-Op Bank saying that they are reducing the interest they will be paying on bank balances me as liquidator of credit unions, and indeed credit unions themselves, hold with them.

The interest rate?    O.03% on balances up £500k.  That’s right, one thirty third of one per cent in interest.

To put it bluntly, bugger all on balances most credit unions might be holding with the Co-Op Bank…about one fiftieth of the inflation rate.

Please let me ask you something…

What’s exactly is the point of credit unions putting their savers’ money with the Co-Op?

Why do they do it?

The vast bulk of the £1.23 billion in credit union saver deposits – the ‘good news’ is its ‘s by 7.8% over the previous year –  yes, one and a quarter billion pounds, a lot of money, and counting! – is earning nothing for savers, not after the credit union costs.

I tell you what the point of credit unions putting their savers’ money with the Co-Op and them paying nothing in interest is…

The Co-Op is bust…

And if it goes under – and it is a shambles – the FSCS also goes under, its pocket is simply not big enough to cope with the Co-Op’s failure.

Put another way, all you savers in credit unions are propping up a bust bank because (1) Co-Operatives are incapable of surviving in this country today in the way they used to be able to, and management are incapable of turning the Co-Op Bank around, it’s a shambles internally; (2) The FSCS cannot pay out if the Co-Op goes bust – we’re talking about a bail-in, rather than bail out (a bail out, some government organisation pays you back all your money: a bail in, you do not get all your money back, you have to write some of it off, you might be told that the £1,00 you had with so and so bank is no only £500.

If Co-Op goes bust, there will be a run on all of the banks.  Co-Op is propped up by credit union savers’ and other ‘soft’ money – if you’re a saver in a credit union, have you really asked where the credit union puts your money?  Hopefully time will paper over the cracks at the Co-Op…- but will it, and why haven’t you been told that your money is at risk, why are you being told that credit unions are a good place for you to put your money safely?

Thanks to all you savers, old and new, you are propping up a bust bank that we cannot afford for it to fail because the system can’t cope with it doing so!

Oh, did no one, not ABCUL, not any credit union, tell you why you’re being encouraged in?

It’s a huge game of pass the parcel!

If you are a saver, you are playing the game, the problem is you’ve no chance of winning a prize, because the music will never stop when you’re holding the parcel.   Instead you’ll be left holding all the wrapping paper for which you will have paid handsomely, and you’ll not get your money back because you will be bailed in…

Still happy with the advice you got to ‘save’ with that credit union?

Will you be suing the advisor for bad advice, like the PPI sellers of yesteryear?

BEWARE! – What you’re not being told could be more important than what you’ve been told (2)

This is the second in what is likely to be a series of articles over the poor advice that my fellow insolvency practitioners are giving out.

In my last article – click here to read it – I talked about how owners of small companies that had no, or very few assets, were being talked into paying for liquidations they neither needed nor were obliged to carry out.  Today, I’m going to be talking about personal insolvencies, specifically a process called an ‘individual voluntary arrangement’ or IVA.

Take a look on the web and you’ll see numerous references to how easy IVAs are to both get into and live through; how they’re great because they’ll write off most of your unsecured debts; how you’ll protect your home; how they will leave you with money in your pocket every month; how they are somehow better and softer than bankruptcy.  It all sounds too good to be true…

And it often is.

You see, what they don’t tell you is that one third of all IVAs fail.  This is not anecdotal evidence, it’s hard evidence gathered by the government – click here to see the figures.  Look at figure 2.

OK, so one third of IVAs fail. Big deal, that’s not so bad, is it?

Well yes, it is.  You see not all IVAs are the same – some are income based, some are ‘one-off’ settlements.  Under a ‘one-off’ settlement type of IVA, money from an inheritance, windfall, gift from family or friends, or the sale of assets is paid into the IVA in a lump and then paid out to the unsecured creditors in full and final settlement of their debts.  The point is this money is certain – it’s probably already sitting there in a solicitor’s or the Insolvency Practitioner’s bank account held on trust pending the creditors’ agreement to the IVA – the success of the IVA is assured.  So if we knock out of the equation the one-off settlement IVAs, the true failure rate for income based IVAs must be higher than a third… let’s be conservative and say it’s 40%-45%.

Do you hear IPs telling people coming to them looking for an income based IVA that the process they are about to go into is about as likely to fail as it is to succeed?  No, I don’t.  Do they warn people of the impact on them of the IVA failing?  If you’re lucky, it’s skated over, after all it’s never going to happen is it? – you have every intention of fulfilling your part of the bargain.

So now we know the IVA has about 50-50 chance of failing as succeeding, but what is the impact of it doing so?

Let’s go back to some basics.  Back in 1986, IVAs were invented as a softer alternative to bankruptcy for sole traders, i.e. business owners.  They weren’t invented to deal with what they have turned out to be used mainly for – hundreds of thousands of consumers who have unsecured credit card and loan debts they could never pay.  So with something like 50,000 a year IVAs being put in place, rather than the handful expected, the insolvency governing bodies got together with the banks and agreed a standard form of IVA for such consumer debtors.

It’s called the ‘IVA Protocol’ – here’s a link to the government’s website linking to its various versions over time – and in a number of ways every version of it is truly horrible.  It’s clear the banks had the whip hand in the negotiations as it’s very much written in the banks’ favour.

So what does it say about failure?  Well, if you miss just 3 income contributions into the IVA over the 5 year period of the IVA – 5 years is the standard duration – the Insolvency Practitioner can petition for your bankruptcy.  It’s at his discretion, you cannot stop him. With many IVAs failing in years 2,3, even 4 or 5 of the IVA, all you’ve done while you’ve been paying into the IVA is throw good money after bad.  And what’s worse, the longer you stay in the IVA, the bigger a chance you’re giving a trustee in bankruptcy of taking your home off you! (house prices tend to go up, your mortgage will have either stayed the same or gone down, so after a time you’ve probably got equity you didn’t have previously that the trustee can get his hands on).

I have a good number of other issues with the IVA Protocol, but what really concerns me is that not once have I ever had someone who’s subject to one of these things come to me ever fully understand what they had got themselves into.  They simply got sold a story that it was the panacea to all their financial woes.  Not once has any Insolvency Practitioner fully explain the ‘what ifs’ satisfactorily so the person fully understood everything they needed to know before taking the plunge.  And that’s inexcusable.

I recognise that no one has a crystal ball that tells them what’s going to happen over the 5 year period of an IVA covered by the IVA Protocol … that people tend to be optimistic as to the future and hate taking a pessimistic view of what might happen … that people who are desperate will cling to any lifeline… but there is never any excuse from any insolvency practitioner for not being entirely honest with the facts and open as to the implications of a 50-50 gamble going the wrong way.  And that’s why I have a problem with my fellow IP’s advice.

BEWARE! – What you're not being told could be more important than what you've been told (2)

This is the second in what is likely to be a series of articles over the poor advice that my fellow insolvency practitioners are giving out.

In my last article – click here to read it – I talked about how owners of small companies that had no, or very few assets, were being talked into paying for liquidations they neither needed nor were obliged to carry out.  Today, I’m going to be talking about personal insolvencies, specifically a process called an ‘individual voluntary arrangement’ or IVA.

Take a look on the web and you’ll see numerous references to how easy IVAs are to both get into and live through; how they’re great because they’ll write off most of your unsecured debts; how you’ll protect your home; how they will leave you with money in your pocket every month; how they are somehow better and softer than bankruptcy.  It all sounds too good to be true…

And it often is.

You see, what they don’t tell you is that one third of all IVAs fail.  This is not anecdotal evidence, it’s hard evidence gathered by the government – click here to see the figures.  Look at figure 2.

OK, so one third of IVAs fail. Big deal, that’s not so bad, is it?

Well yes, it is.  You see not all IVAs are the same – some are income based, some are ‘one-off’ settlements.  Under a ‘one-off’ settlement type of IVA, money from an inheritance, windfall, gift from family or friends, or the sale of assets is paid into the IVA in a lump and then paid out to the unsecured creditors in full and final settlement of their debts.  The point is this money is certain – it’s probably already sitting there in a solicitor’s or the Insolvency Practitioner’s bank account held on trust pending the creditors’ agreement to the IVA – the success of the IVA is assured.  So if we knock out of the equation the one-off settlement IVAs, the true failure rate for income based IVAs must be higher than a third… let’s be conservative and say it’s 40%-45%.

Do you hear IPs telling people coming to them looking for an income based IVA that the process they are about to go into is about as likely to fail as it is to succeed?  No, I don’t.  Do they warn people of the impact on them of the IVA failing?  If you’re lucky, it’s skated over, after all it’s never going to happen is it? – you have every intention of fulfilling your part of the bargain.

So now we know the IVA has about 50-50 chance of failing as succeeding, but what is the impact of it doing so?

Let’s go back to some basics.  Back in 1986, IVAs were invented as a softer alternative to bankruptcy for sole traders, i.e. business owners.  They weren’t invented to deal with what they have turned out to be used mainly for – hundreds of thousands of consumers who have unsecured credit card and loan debts they could never pay.  So with something like 50,000 a year IVAs being put in place, rather than the handful expected, the insolvency governing bodies got together with the banks and agreed a standard form of IVA for such consumer debtors.

It’s called the ‘IVA Protocol’ – here’s a link to the government’s website linking to its various versions over time – and in a number of ways every version of it is truly horrible.  It’s clear the banks had the whip hand in the negotiations as it’s very much written in the banks’ favour.

So what does it say about failure?  Well, if you miss just 3 income contributions into the IVA over the 5 year period of the IVA – 5 years is the standard duration – the Insolvency Practitioner can petition for your bankruptcy.  It’s at his discretion, you cannot stop him. With many IVAs failing in years 2,3, even 4 or 5 of the IVA, all you’ve done while you’ve been paying into the IVA is throw good money after bad.  And what’s worse, the longer you stay in the IVA, the bigger a chance you’re giving a trustee in bankruptcy of taking your home off you! (house prices tend to go up, your mortgage will have either stayed the same or gone down, so after a time you’ve probably got equity you didn’t have previously that the trustee can get his hands on).

I have a good number of other issues with the IVA Protocol, but what really concerns me is that not once have I ever had someone who’s subject to one of these things come to me ever fully understand what they had got themselves into.  They simply got sold a story that it was the panacea to all their financial woes.  Not once has any Insolvency Practitioner fully explain the ‘what ifs’ satisfactorily so the person fully understood everything they needed to know before taking the plunge.  And that’s inexcusable.

I recognise that no one has a crystal ball that tells them what’s going to happen over the 5 year period of an IVA covered by the IVA Protocol … that people tend to be optimistic as to the future and hate taking a pessimistic view of what might happen … that people who are desperate will cling to any lifeline… but there is never any excuse from any insolvency practitioner for not being entirely honest with the facts and open as to the implications of a 50-50 gamble going the wrong way.  And that’s why I have a problem with my fellow IP’s advice.

Just set up a new business? Read this if you want it to be a success!

As an insolvency practitioner, I have met met hundreds of new business owners…wouldn’t it be great if you could learn what I’ve learnt from all those meetings?

Well you can!  Here’s an article just for you…

So you want to set up in business, do you?

Or you’ve recently started trading but not doing as well as you hoped?

Would you like to know how to avoid going under? How to give it the best chance of being a success?

You see, there’s a big problem with small businesses.  And that is when most people go into business, they only look at the positives such as what they’ll do when things really take off.  Things like what new car they’ll buy, how they’ll spend their increased free time, how they’ll manage all that profitable work? ….
… They build the business on two things:

(i) what they think they know; and

(ii) what they hope.

They don’t go out of their way to find out what they don’t know or to plan for things not going quite to plan.

Yet it’s often what they don’t know or haven’t thought about that will eventually kill the business.  And with it, destroy their hopes and dreams, and often their own and their family’s finances.

The bad news is that’s how it turns out for the 4 out of 10 new start-ups – yes, 40% of new businesses fail within the first 2 years!

That’s almost as many businesses fail as are still alive within just 2 years.  But it doesn’t end there – of the survivors, most then go on to fail within the next 3 years.  Only one in ten are still around by year 5.

The point is you will fail if you follow the course most new business owners do. Yet with so many not making it, there’s an abundance of experiences out there that you can learn from. And it’s free to do so!  Here they are…

The business was started for the wrong reason

Some businesses are set up and then run more like a hobby than a business.  I call these ‘lifestyle businesses’ – they tend to merely exist, either doing poorly or at least not doing spectacularly, until something happens later to cause the wheels to come off…

It scares me that right now many small businesses being set up out of necessity – because there are no jobs around – rather than by someone who has identified a profitable opportunity.

Why have you set up?

I can do it all myself!

In his book, the E-myth, Michael Gerber spoke of the 3 skill-sets needed by business owners today – entrepreneurial, managerial and technical.  No one I know has all three, in the right degrees.  Businesses that don’t have and won’t buy in all three skill-sets lack the cutting edge to succeed in today’s harsh business environment.  Seeking help from outside the business to plug skills gaps is a show of real strength, not of weakness…

Read the book, plug the gaps!

Not enough money

It always costs more to set up a business than you expected and then survive the inevitable troughs later on.  At this time when the banks are selective as to whom they lend to and seem to fail to support customers when they most need them, it’s not a good idea to rely on credit lines over which you don’t have full control.

Have you taken a good amount of time to assess how much money you will need, where you can get it from and how you’d cope with what might happen when business dips?
Poor financial skills

It is vital that you understand how the business works financially.  If you don’t, it won’t be long before you won’t have a business because you don’t properly understand the machine that brings in the cash it needs works.  Also, if you’ve got weak financial skills, you probably don’t have a strong profit motive.  Sure, you love what you do, but you’ll return to stereotype ‘manager’ or technician’ – see above – roles when things get tough, and when you do, you’ll dig the business into an even bigger hole rather than solve its problems.

Do you understand exactly how how the business ticks financially?  Do you understand the figures?  Think about going to college to learn management and accounting if you don’t.  Don’t try to abdicate responsibility for your business’s finances to an accountant – sure it’s ok to hand the processing to him, but not responsibility.
The location, the product or service is all wrong

Quite simply, the business opportunity was not fully explored, optimism blinded reality… there are many businesses in our High Streets which have got the location, product or service wrong.  I stand there and think ‘just what is the owner thinking?  It just doesn’t stand a chance!’

Have you allowed your heart to overrule your head?
No planning

Have you heard the saying ‘to fail to plan is to plan to fail’.   Have you planned for what is going to happen?  And what might happen? – you see the unexpected does happen, increasingly so today!

A lot of the things that cause businesses to fail can be anticipated, plans can be formulated to avoid failure.

Have you spent enough time thinking about what is going to happen and how you’d deal with what might happen?

Poor trading levels

Where a business suffers poor trading levels, often their owners cut costs to manage their cash flows – they do this because it’s often the easiest decision and produces short term cash benefits.  However, if this is all you do, you’re merely storing up much more serious problems into the medium term.  It’s simply not possible to cut yourself to greatness!…

If things don’t work out in terms of sales levels, what’s your plan? How certain are your planned sales figures?
Poor marketing

Many businesses wait for sales to find them, because ‘that’s what you’ve always done’.  If you have worked for someone and have now gone to work for yourself, this could be a big problem for you.  I often can’t ‘find’ any presence anywhere of such businesses – there is no website, no sales force – and if I can’t find you, how can you expect would-be customers to find you?

What’s your marketing plan?  Have you written it down? Do you follow it up?
Failing to set and follow a clear strategy for success

Without a formal plan, businesses develop haphazardly.  And one day you’ll scratch your head and wonder just how the business got to where it is now – it will then be slowly strangled, by ‘unfair’ relationships with a major customer, by your banking constraints, or something other you could have anticipated, …

What’s your strategy?  have you written it down?  Do you act on it?
Business model with high fixed costs

An inflexible business model with high fixed costs may work in boom times, but it will cause significant problems in the inevitable times of bust.

Tell me all about your fixed costs…
Finally, knowledge without action is pointless, it won’t change the outcome, so now go and do something about it!
Paul Brindley FCA, Licensed insolvency practitioner
Midlands Business Recovery