By John Harlow, director, Harlow Insolvency
I was driving back into my village in the Vale of Belvoir this week and approached it from the canal end, which entails going over a hump back bridge. It’s quite a steep bridge and sod’s law dictates that if you hit it too fast, there is bound to be something on the other side, such as a horse’s backside, an on-coming tractor or a delinquent tom cat! I’ve learned over the years to expect this as the norm and thus I now approach the bridge with caution and my foot covering the brake pedal.
I thought no more about this until I was discussing with a colleague the topical subjects of paucity of insolvency work, increases in rates of interest (when and by how much) and overtrading in companies following an upturn in the economy.
Most people will by now have heard that, strange as it may seem, insolvency work has actually gone down during the recession. No more tears have been shed for the poor hard done by Insolvency Practitioner than they have for the poor accountant or the poor solicitor, yet it is a fact that the recession has hit the professional services industry as hard as anywhere.
Hankies away now, for us it’s a case of physician heal yourself. We’re supposed to be aware of the pitfalls of business and capable of anticipating events and taking appropriate action; but what of the small businessman, hanging on by his fingernails and waiting for evidence of the upturn that’s been heralded in the media?
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For him the prospect of an upturn in the economy is exciting and he may already be experiencing an increase in his order book. This however, is where he actually needs to start exercising care; coming out of recession is a bit like approaching the top of the hump back bridge and businessmen need to proceed with caution.
History has shown that increase in trading activity following a recession can lead to over-trading and IPs are well aware that work invariably picks-up as a result. Staffing-up or purchasing stock to fulfil a burgeoning order book can rapidly cause a cash flow hiatus. Cash is king, so they say and if a business is inadequately funded or ill-prepared, then it may quickly find that it is unable to pay its debts as they fall due.
Many SMEs experiencing some financial distress have survived the recession purely as a result of lenient creditors (especially the Crown departments) and low interest rates. These so-called Zombie businesses have been kept going through this lack of creditor pressure but are likely to be the first ones to suffer as we crawl out of recession.
Returning to my original analogy, the seemingly imminent prospect of a rise in the rate of interest is an additional danger lurking on the other side of the bridge. Much has been reported, on an almost daily basis about this rise, possibly to happen in a couple of weeks, maybe not until next year. A general election looms, which again may influence decisions on these matters. Such uncertainty is hardly good for confidence in the business world and the spectre of increase is something which company directors and individuals alike will ignore at their peril.
The housing market is experiencing something of a resurgence, but before committing themselves to a mortgage based on the maximum they can borrow, buyers should consider the impact of an increase in the interest rate, which could quickly have an adverse affect on their ability to service the loan.
Good financial planning must therefore provide for possible interest rate increases; these should be anticipated and not come as a nasty surprise. Spending must be kept within funding limits and adequate provision should be made for Fetlocks, Fergusons and Felines.