Date Published: 5th September 2008

DENIAL! One word which sums up the mindsets of all too many chief executives and finance directors who refuse to acknowledge problems at an early stage when the amber light is flashing.

Unrealistic expectations, lack of detailed information, hopes of ‘jam tomorrow’, misplaced optimism of a significant chunk of income coming through today, or the next day, even the next week, inevitably lead to the door with ‘Insolvency’ in big, bold letters on it.

Challenging economic times such as those we are now experiencing see a broad range of sectors affected by the downturn, from retail and manufacturing to leisure and technology, and the demand for advice is growing daily. But there are still all too many businesses out there that refuse to face up to difficulties becoming more acute and potentially more disastrous by the day. Fear of change, all the uncertainty about what the future might hold when any solution could lead to control of the business passing to someone else is again another major factor in the paranoia of denial. The problem is that denial eventually leads to a catastrophe which has just been waiting to happen.

Early recognition of any problems and facing up to the often stark reality they pose is crucial if insolvency is to be avoided. We are not corporate undertakers, rubbing our hands together in eager anticipation of a business calling upon our services and then administering the last rites; wherever possible we help businesses find the best solution that allows for positive steps towards financial recovery. The old adage of a ‘stitch in time saves nine’ couldn’t be more appropriate in the current economic climate with doom and gloom predictions from the pundits on a daily basis and we are trying to get that message across to as many businesses as possible. We are optimistic that many sectors of the economy will remain strong and we try and help businesses stay operational where possible but the key to this is often early involvement.

It may be that the managing director of a company is more focused on the day-to-day running of that business and the people in it and doesn’t have the time or, as a symptom of denial, want to find the time to stand back, see the bigger picture and what needs to be done to withstand the challenges of the ‘credit crunch’ and recessionary conditions. Recession, technically two successive quarters of negative growth, is looming if the pundits’ predictions are correct

That same MD of a small or medium sized business may be attempting to fend off calls from suppliers or others wanting payment. In desperation payments are made but then cheques are bounced, a decree is awarded against the company. The MD, and sometimes the FD, who ignores all this and buries a now muddled head in the proverbial sand does so at his or her peril. It may be of course that the MD is not being given a true rundown by the FD on the company’s looming financial plight.

Other amber lights include creditors taking longer to pay, or suddenly it is announced that a major customer has gone ‘bust’, may be the sector the business is in has declined as a whole. By this stage denial is all too often coupled with acute stress which can have a disastrous impact on health, might even lead to marital breakdown and, at the very worst, suicide when it all becomes too much. All because of ‘denial’! There is also perhaps the fear of change. After all, this is a business you the MD have founded, seen grow and now, because of circumstances outside your control, you are losing your grip on it. Seeking advice you see as weakness, that advice could mean others having sway over the future direction of the business. By hanging on in there for a few more months, all will be resolved so you think, it’s just a bad patch the business is going through. This is not only denial but self-delusion.

Facing up to those problems, in that beleaguered individual’s eyes, and seeking professional advice all too often represents an admission of failure. What is often overlooked as a result of blinkered vision is that one weak division is bringing the company down; by disposing of it the rest of the business may well survive as a viable operation, jobs are saved and goodwill preserved. Another factor which adds to ‘denial’ is the fear of being perceived as a failure by your peers and the shame that goes with it. The dreaded ‘I’ word – Insolvency – is taboo in any discussions. Insolvency happens to other businesses, not to yours, the mere thought of it is total anathema. Think again, because all of that is unadulterated balderdash!

There is neither shame nor failure to insolvency , it happens all the time but can be avoided if advice is taken at an early stage by banishing ‘denial’ and looking at the broader picture, perhaps with the help of professional advisers. When advice is sought early enough there is a real possibility of avoiding insolvency but once the likes of a winding up petition have been served then the chances are decidedly remote. A deterrent to seeking advice is often concerns as to what it might cost but a first meeting to assess the situation and possible ways forward will cost nothing.

We come back to ‘denial’ because this is the real problem. Snap out of it, recognise the problems and seek advice from the professionals who can and will look at the bigger picture. Should you delude yourself that things can only get better the inevitable day of reckoning will come when the plug is pulled and you are referred to the likes of us by your bank or accountants as a suitable case for insolvency treatment.

About the author

Ken Pattullo

Regional Managing Partner

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Ken joined the Glasgow office of Begbies Traynor in 2003, before overseeing the firm's expansion into further offices in Edinburgh, Dundee, Aberdeen and Belfast. He previously worked at KPMG, Ernst & Young and PricewaterhouseCoopers in Scotland. He has a broad range of experience in Corporate Rescue and Recovery, as well as in turnaround and restructuring, corporate and personal insolvency, investigations and IBRs.

Specialisms: Licensed trade, haulage, property investment/development, construction, agriculture engineering/manufacturing.

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