In simple terms, how do I explain a company going under?

[james_tigerwoods]

My OH was asking me last night why it is that so many companies are going under at the moment - Now I think I blathered on about how if a company can't raise cash then it can't function, etc, but I'm not sure I got it right (she was convinced though).

So, in simple (ish) terms can someone explain to me:

Why/how it is that a company that seems in a good state (has little debt) can fold quickly (like "Land of Leather")
Why/how it is that a company that seems to be making a profit can go under
Apart from the obvious "noone shopped there any more" - what happened to Woolworths (was it too much debt or just no sales)
Why so many small companies at the moment seem to be just collapsing

I know I'm generalising, but some of this, I just don't get and I'd like to at least use my PH knowledge to impress

[barney123]

A lot of the problem at the moment [ie JCB] is that they can no longer refinance their debts. ie Banks pulling in the reigns.....

[james_tigerwoods]

barney123]A lot of the problem at the moment [ie JCB said:

is that they can no longer refinance their debts. ie Banks pulling in the reigns.....

What exactly does "refinancing their debts" mean though?

[Puggit]

james_tigerwoods said:

barney123]A lot of the problem at the moment [ie JCB said:

is that they can no longer refinance their debts. ie Banks pulling in the reigns.....

What exactly does "refinancing their debts" mean though?

Like when you remortgage after 2 years - juggling the debt around.

If you don't manage to get another new mortgage at a tempting rate, your bank will have you over a barrel.

[barney123]

james_tigerwoods said:

barney123]A lot of the problem at the moment [ie JCB said:

is that they can no longer refinance their debts. ie Banks pulling in the reigns.....

What exactly does "refinancing their debts" mean though?

If they owe their bank 1m then this will usually be structured over a certain period (1 year etc) and then the bank will renew the loan with
whatever new rates / restrictions it wants. They can also decide to call in the loan (they can do this at any time !). If they think you're not likely to be able to meet the repayments, they will foreclose sooner while the chances of a greater return are still there.

Its mostly to do with confidence. Banks, by enlarge, are useless when it comes to business (thats why they work for banks), other than looking at a Profit&Loss / Balance Sheet.

Edited by barney123 on Tuesday 13th January 09:21

[james_tigerwoods]

Puggit said:

james_tigerwoods said:

barney123]A lot of the problem at the moment [ie JCB said:

is that they can no longer refinance their debts. ie Banks pulling in the reigns.....

What exactly does "refinancing their debts" mean though?

Like when you remortgage after 2 years - juggling the debt around.

If you don't manage to get another new mortgage at a tempting rate, your bank will have you over a barrel.

So you're paying back a loan at a high rate (that would have been negotiated 6-12 months ago) which is bad because noone's buying your prodcut, therefore your loan repayments are too high and your sales aren't covering your debt repayments?

Have I understood that right?

Is that the case for most bankruptcies at the moment?

[james_tigerwoods]

barney123 said:

james_tigerwoods said:

barney123]A lot of the problem at the moment [ie JCB said:

is that they can no longer refinance their debts. ie Banks pulling in the reigns.....

What exactly does "refinancing their debts" mean though?

If they owe their bank 1m then this will usually be structured over a certain period (1 year etc) and then the bank will renew the loan with
whatever new rates / restrictions it wants. They can also decide to call in the loan (they can do this at any time !). If they think you're not likely to be able to meet the repayments, they will foreclose sooner while the chances of a greater return are still there.

Surely if they call in the loan early, then there's a huge chance that the company won't be able to repay it anyway? Where's the sense in that?

[Adrian W]

As sales reduce the cash coming in reduces as well, to start with this looks good because the stock turns to cash. Then after a while the company needs to borrow money to buy more stock and to pay it's costs, the bank say no, the company cant pay its costs and thats it.

[Adrian W]

I thought he said in simple terms

[turbobloke]

Adrian W said:

I thought he said in simple terms

Albert allegedly said:

Everything should be made as simple as possible, but not simpler.

[james_tigerwoods]

Adrian W said:

I thought he said in simple terms

He did

Is it as simple as No sales = No inward cash flow = No debt payment? If so, how is that a good business model - surely the point of a company is that it does not need to rely on loans/debts?

How does it work for a company that is self financing, ie, has no debt (do such companies exist?)

[Plotloss]

Its the opposite to fat birds.

The out hole is bigger than the in hole.

[Adrian W]

you can't get simpler than i posted above, company can't cover its costs, can't borrow and thats it

[superlightr]

james_tigerwoods said:

Adrian W said:

I thought he said in simple terms

He did

Is it as simple as No sales = No inward cash flow = No debt payment? If so, how is that a good business model - surely the point of a company is that it does not need to rely on loans/debts?

How does it work for a company that is self financing, ie, has no debt (do such companies exist?)

Strange that. I too would have thought that the firms would have needed to borrow money to set up business, but if it is sucessful then it pays thoses debts and funds itself? Clearly it will take a number of years but if say Woolworths was doing ok and trading for 100 yrs surly it would have made enough profit to pay back its start up costs and have funds to buy its stock - if not then its a crap business.

My own business is small but I dont rely on bank funding as we have ploughed back profit so we are not reliant of outside funding - this is a good business plan in my view?

[Tuska]

james_tigerwoods said:

Puggit said:

james_tigerwoods said:

barney123]A lot of the problem at the moment [ie JCB said:

is that they can no longer refinance their debts. ie Banks pulling in the reigns.....

What exactly does "refinancing their debts" mean though?

Like when you remortgage after 2 years - juggling the debt around.

If you don't manage to get another new mortgage at a tempting rate, your bank will have you over a barrel.

So you're paying back a loan at a high rate (that would have been negotiated 6-12 months ago) which is bad because noone's buying your prodcut, therefore your loan repayments are too high and your sales aren't covering your debt repayments?

Have I understood that right?

Is that the case for most bankruptcies at the moment?

Not really. For most SME companys the problem is that they cant find anyone to give them a new loan at all. Say they owe £100k which is used as day to day cashflow. The bank chooses to recall the loan, or will not offer the loan again at the end of its term. Without cash, the SME folds.

Bad debts are of course the other killer, for all the same reasons.

[james_tigerwoods]

anonymous said:

[redacted]

If you're in a boom period, in that case, wouldn't you ensure that as much profit as possible is banked to allow for this? Something I know can't last forever, but don't some companies expose themselves unnecessarily?

[james_tigerwoods]

Plotloss said:

Its the opposite to fat birds.

The out hole is bigger than the in hole.

Can't be more PH or simple than that

[Adrian W]

anonymous said:

[redacted]

Trouble is you do all your budgets and forecasts and are on top of it and then one of your large customers doesnt do what he said, and screws it up.

[Tuska]

superlightr said:

Strange that. I too would have thought that the firms would have needed to borrow money to set up business, but if it is sucessful then it pays thoses debts and funds itself? Clearly it will take a number of years but if say Woolworths was doing ok and trading for 100 yrs surly it would have made enough profit to pay back its start up costs and have funds to buy its stock - if not then its a crap business.

My own business is small but I dont rely on bank funding as we have ploughed back profit so we are not reliant of outside funding - this is a good business plan in my view?

Woolies and MFI refinanced by selling their properties to Venture capatalists and the leased them back. It made them very cash positive but also meant that they couldn't control their overheads when the sales figures fell....

[Tuska]

james_tigerwoods said:

If you're in a boom period, in that case, wouldn't you ensure that as much profit as possible is banked to allow for this? Something I know can't last forever, but don't some companies expose themselves unnecessarily?

Cash in the bank is taxed heavily. You spend to avoid corporation tax. Operating with a negative cash position can also be set against tax. I'm not an accountant however, perhaps Eric will be along shortly.