Administration gives a struggling company breathing space from its creditors. Once it starts a review of company operations is undertaken. Changes can then be implemented to allow the business to trade profitably. However Administration can lead to significant difficulties.
- How can Administration affect Company Sales
- Will Administration affect Suppliers?
- The role of Directors in Administration
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How can Administration affect Company Sales
The fact that a company has been put into Administration must be advertised. All correspondence including that to customers must clearly highlight the Administration. As a result customers may start to worry about the viability of the business.
A likely outcome of Administration is that all or a significant part of the company may be closed. Customers will be aware of this and it may prompt them to start looking for alternative suppliers. This will often be the case if uninterrupted supply from the company is critical to the ongoing success of the customer.
New clients may also be put off from working with the company. Considerable time and effort has to be put into implementing new contracts. New clients are unlikely to want to do this with a business that may not exist after 12 months.
The affect of Administration on Suppliers
Because it is highlighted on correspondence to them suppliers will also be aware that the company is in Administration. They may then start to worry that they will not be paid. As a result they may refuse to continue working with the company. Alternatively they may only agree to supply on a cash on delivery basis.
Changes in suppliers relationships are likely to put increased pressure on the company’s cash position. As a result a likely outcome when a business is put into administration is the sale of any valuable elements. The remaining areas of the company are then closed.
The negative effect that Administration can have on client and supplier relationships often results in a company being closed rather than saved.
Administration and Director Control of a Company
Once a company is put into Administration the Directors lose control of the business. All decisions are then taken by the Administrator. The directors cannot take any actions that will affect the company without the authority of the Administrator.
The Administrator’s role is to protect the interests of the creditors. Their decision making process is therefore likely to be focused on retaining funds in the short term. They are not necessarily interested in making strategic decisions which might help the company over the longer term.
Small to medium sized company directors are likely to be interested in preserving longer term prospects for their business. They are therefore likely to be better off considering an alternative rescue solution such as a CVA or Pre Pack Liquidation.