A cash crisis caused by theft
Colobus was asked to help with a turnaround in a technology business which had got into a situation of over-borrowing from its invoice discounter while simultaneously being at its overdraft limit and behind with a significant unpaid PAYE and VAT liability.
Looking closely at the company’s bank account it became clear that the Managing Director had been syphoning off money. He tendered his resignation and we agreed with him to treat these sums as an unauthorised loan, to be repaid, rather than theft. We needed to disclose this to HMRC, which had the result of reducing an R&D tax recovery by almost £50k (if an employee takes money from you that is an allowable business expense whereas if a “participant” e.g. shareholder or director does the same, that isn’t allowable). This compounded the cashflow problem.
This company deserved to succeed. Its very first client was still a happy customer after 20 years, its biggest customer had been a happy client for 15 years and other clients were equally happy. So we set about making sure that our client did succeed.
We negotiated the return of funds taken by the former MD. This could easily have been a high conflict negotiation but It is extremely rare that there are no common interests between parties. In this case the company’s interest was in recovering the funds it had lost and the former MD wanted to avoid prosecution. Of course, he’d spent the money but he was able to re-mortgage his home and that gave us both an opening for negotiated agreement over the repayment. The company made a full disclosure to HMRC, which is what we would recommend you do if you find yourself in similar circumstances.
We negotiated a 12-month time to pay arrangement with HMRC. HMRC had already been given a clear explanation as to why we needed time to pay PAYE and VAT. This bought time to solve the other issues.
The Accounts Payable was pretty well up to date, so we had no problems in this area; it just needed to be kept on top of.
The company had an excellent credit controller, in our experience a very under-rated role and one which calls for mastery of two elements: (i) collecting your money and (ii) keeping the client. We used cash flow to clear both the overdraft and bring the invoice discounting facility within terms.
Removing the former MD saved plenty of cash but we also looked closely at the operating expenses and helped the company take a significant chunk out of opex without having any negative impact on sales or customer service.
Within about 3 months we were able to completely eliminate the need for the invoice discounting facility and, although it took longer for the former MD to repay his debt, the steps that we took enabled the company to be certain of survival during the Covid-19 crisis and grow by adding new customers, even while much of the economy was contracting.