With the pandemic, many businesses are in difficulty, or are likely to be so in the short term. Benoit Nowaczyk, chartered accountant associated with Walter France, and Edouard Bertrand, associate lawyer of the law firm Lamy Lexel, explain how they can use legal and financial tools to prepare for the future, and what reflexes should be developed to prevent these difficulties, starting by not being alone and getting advice and support.
The decline in insolvencies despite the crisis is the great paradox of this period. In 2020, GDP fell by nine points in France. Job protection plans have been doubled : 530 PSEs led to the termination of more than 70,000 employment contracts. Online job offers fell by 25% and cumulative corporate debt jumped by 13%, reaching 1200 billion euros. Paradoxically, despite this worrying situation, business failures fell by 40%. Certainly, some major media issues, especially in retail, mobilized the media. However, it is clear that the number of failures is low. The reason certainly lies in the effectiveness of state aid., with first and foremost the EMP – state-guaranteed loan, as well as partial activity, the solidarity fund and the exemption or deferral of social charges, that provided businesses with the cash and time they needed. Note that among the 630,000 companies which benefited from an EMP (for a total amount of 135 billion euros out of the 300 billion that had been budgeted), 88% are VSEs with fewer than 10 employees, and 6% of SMEs with fewer than 250 employees ; while mid-sized companies and large companies only represent 0,3 %.
Beware of “fictitious” cash flow
The central question that arises today is how companies will reimburse their PGE. Indeed, this loan was not taken out to finance investments, which is normally the objective of a loan, but to absorb losses. And it risks being added to the loans previously contracted by companies and those to come to finance the resumption of activity and innovation. If it occasionally improves the balance of their bank account, it must not mask their possible difficulties. To relieve businesses, the state gives them the choice : is, as originally planned, benefit from a one-year exemption (for most this period expires between April and June) and repay the loan over four years ; or benefit from an additional year of franchise (two years in total) but by repaying the loan over four years. Globally, other government measures allow businesses to have a little more cash flow, or to reduce their charges.
Survival issues for the return to autonomy
How to ensure that the measures to move from a situation of aid to a return to business autonomy are taken or can be taken ? How to manage the impacts of the current situation – refund, evolution of activity… – so that they do not jeopardize the sustainability of the company ? Today, many businesses are fragile : either because they are “on a drip” of aid, either because the impact of the crisis will be felt later, in 2021, or the opposite, for those who benefit from the windfall effect, because they must manage growth and ensure their working capital needs. For some, activating legal procedures can be a good strategy. But for all, anticipation and prevention are the key to sustainability. That is why, since a year, accountants, the lawyers, the auditors, economic partners and financial partners work on a daily basis, and as a team, to come to the aid of businesses. If the first phase of the crisis in 2020, thanks to their mobilization and government aid, did not cause too many failures, it is essential that managers understand that they have every interest in continuing to work in symbiosis with them, in order to deploy an effective strategy which will be a guarantee of their sustainability. Indeed, temporary aid will evolve towards a situation of structural assistance that is less and less favorable : the “whatever it takes” will gradually fade away…
The first aid kit : orders for this, conciliation and safeguard
French law is very comprehensive and offers a certain number of solutions which do not exist in many countries.
This system has proven itself. The “emergency doctors”, specialists in companies in difficulty, are ultimately quite few in number, with an advantage : everyone knows each other among accountants, lawyers, judicial administrators, commercial courts, and have the ability to mobilize quickly in “commando” mode, because the notion of time is decisive in these procedures. The two least traumatic measures, amicable, are the ad hoc mandate and conciliation, which can be initiated as long as the company has not yet ceased payment or has been insolvent for a very short time (less than 45 days). How does this happen ? The company or its counsel submits a request to the president of the court to appoint either an ad hoc representative, or a conciliator. These two experts are specialists in dealing with difficulties. It is important to emphasize that this is an appointment in the office of the president of the commercial court, in no case a “ceremonial” which could recall a “punitive hearing” ! Furthermore, the president of the court is not just a magistrate, but also, and above all, a business manager, who understands the situation and looks kindly. Their position is to provide support and accompaniment to the company in difficulty. During these meetings, it is explained and proven that the company is not in a state of insolvency (or that she has been there for a short time) but if nothing is done, his situation will worsen quickly. It is he who will appoint the ad hoc agent or conciliator that the company has chosen.
The interest is twofold
The agent or conciliator will choose the creditors with whom he will initiate discussions. Most of the time, these are the banks (to suspend capital repayment for example, or even to obtain a new loan), public creditors (Urssaf, taxes) and often the shareholders. Suppliers are rarely contacted, because they could disseminate information within the company’s eco-system. Clear, the company takes an informed negotiator to its side. Ensuite, these two procedures are strictly confidential, without any legal or other publicity. This is an act of day-to-day management. The numbers speak for themselves : 80% success for ad hoc mandates, 70% success for conciliations. Managers really benefit from using these tools. If the company is in default of payment, it is then the backup procedure that applies, with a court judgment : no one can ignore that the company is placed in judicial protection. In all cases, financial information must be reliable : an independent expertise on the state of the company and in particular its cash flow situation is a must. Switching from one procedure to another is possible at any time.
The dividing line : the status of cessation of payment
Let's remember the basic principle : as long as the company is not in a state of cessation of payments or has been so for less than 45 days, it can appeal to the ad hoc mandate or to conciliation.
If the only selection of a few creditors (bankers, lessor credit, Urssaf, Public Treasury, shareholders…) does not prove sufficient to relieve cash flow, or that it is already in a state of cessation of payment, it is automatically and directly towards a backup procedure that you will have to turn. The legal definition of cessation of payments is as follows: : the impossibility of meeting due liabilities with available assets. Current liabilities include only overdue debts for which payment is required immediately : operating debts, prosecutors, social and banking. Available assets correspond to liquid assets, that is to say realizable or convertible into money quickly. However, current assets (inventories and customer receivables), although not liquid, can become (factoring, pledge on stocks…). It is therefore essential to have a dynamic approach in the short term, one or three months, to be able to anticipate the measures to be taken if a risk of cessation of payments is identified.
Cash flow forecasts : alive and dynamic
Normally, cash flow forecasts are an integral part of sound management. But in times of pandemic, They are totally essential. This involves developing a document in which the company and its advisors project themselves, month to month, in the medium term : 18, 24 or 36 months maximum, to quantify cash generation and consumption. The interest is obvious internally to anticipate difficulties and take the necessary measures in time, and externally to convince the banker who will only accept postponements of deadlines if we can demonstrate to him through A + B this imperative necessity. To design an effective cash flow forecast, this must integrate two criteria. The spreadsheet must be dynamic, vivant, and updated as often as possible : a service provider who lets go, or conversely one more order, must be able to be integrated immediately. The cash flow forecast must also identify the key elements of the business, the famous KPIs – key performance indicators – likely to have a positive or negative impact on the company's cash flow.
Prevention : the strategic and financial reflexes to develop
Whether the business is in difficulty or doing well, today nothing is acquired, and all leaders must acquire the right reflexes that will allow them to be “always ready” whatever happens..
1 – Continue to adapt your new ecosystem : take care of your suppliers, find new ones, develop your digital offering, optimize your processes… The manager must constantly think about these subjects. Clear, “forced” agility in 2020 must become natural in 2021.
2 – Do not hamper your negotiating ability. Pay your tax and social debts. Take care of your strategic suppliers : if one day the leader has to negotiate with them, they will be more inclined to negotiate if it has been correct with them.
3 – Develop decision-making flexibility, For example, should the EMP be reimbursed or extended? If tomorrow the situation changes, you have to be able to negotiate with all the cards in hand.
4 – Focus on cash flow : analyze what generates cash, define your key indicators, do not hesitate to make strategic choices ; if for example a division becomes less efficient, plan three months ahead, etc.
5 – Be extremely vigilant about working capital requirements. The manager can find himself overnight with customers who cannot pay, suppliers who can no longer deliver. For fast-growing businesses (there are some during this pandemic), anticipating WCR needs is just as vital as for companies in difficulty.
6 – Don't be on autopilot. Ban, for example, automatic reminders of invoices from customers who are 30 or 40 days late. Treat everything on a case-by-case basis, call your partners, to “feel” trends and, SO, anticipate failures.
7 – Think “cash”.
8 – Don't stay alone !
