Pre-pack is the new politically friendly Phoenix, where the business, not the company, is migrated to another corporate vehicle. This is achieved by the directors acquiring the assets, goodwill, intellectual property and so on from the administrator. This way, the bulk of the company’s jobs are safe, customers receive
seamless support and suppliers are given a better credit risk.
The pre-pack procedure is relatively cheap, quick and friendly. The subtext is that directors are trying to minimise the damage to all stakeholders. Often, the alternative is a frenzied liquidation resulting in loss of credibility and supplier goodwill and staff walking out.
Another way of resolving cashflow problems is to set up an informal arrangement with principal creditors. The prescriptive solutions advanced by some “insolvency experts” are often more painful in the long run but the key to a successful informal arrangement is the availability of quality management and financial information. Cashflow forecasts prove the ability of the company to continue trading, assuming there are profitable sales in the pipeline. Furthermore, if creditors are asked to agree a short-timed repayment proposal, there are remedial steps that must be taken, in cost-cutting or re-modelling the business.
Suppliers are asked to support trade by retaining some credit cover, which is not a problem if everything else looks good.
The role of credit insurers has reached mythical proportions. They are not the devil incarnate in the land of the risk mitigators or spotty little Herberts, sitting in black suits counting beans; they are partners with a stake. Insurers are there to enable trade, albeit safely. If it stacks up, they will support it, but they will not back a flyer.
The worst approach is to treat credit managers in distribution companies as idiots. They are not. They know more about the channel business than bank managers. Their art is very skilled and they sell more than their sales colleagues.
So, with cashflow problems, greater communication is the obvious prognosis to corporate illness. This will keep it in intensive care, which is better than the morgue, so listen to credit managers’ advice.
Nitin Joshi is founder and director of Channelmoney.