Roger Trapp: Treat the Chancellor's optimism with caution

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The Independent Online

What with a steady stream of cheerier economic news and a feeling that - for many of us, at least - winter came and went with last month's cold snap, it would be easy to run away with the idea that the good times are here again.

What with a steady stream of cheerier economic news and a feeling that - for many of us, at least - winter came and went with last month's cold snap, it would be easy to run away with the idea that the good times are here again.

It is an impression that Gordon Brown, the Chancellor, can certainly be expected to nurture in his Budget speech on Wednesday. But growing businesses need to beware the Ides of March. It would not be too surprising if Mr Brown's by now familiar pronouncements about enterprise are accompanied by the closures up and down the country of just the sorts of businesses the Government professes to be encouraging.

True, businesses open and close all the time - the numbers setting up and packing in are about even most years - with the result that the total stock stays about the same. Nevertheless, March is traditionally a busy month for insolvency specialists - for the simple reason that this is when the Christmas Hangover takes effect.

Mark Smillie, a partner with the London-based insolvency practice Middleton Partners, spells out the typical chain of events that can quickly convert an apparently successful business into another casualty.

The company enjoys good October/November sales figures and then spends the money - on a Christmas party, bonuses, new cars and other trappings. Then the business has a period of about two weeks in which effectively no work is done - with a predictable effect on a cashflow already depleted by festive spending. "In January, the average trading company [not including retailers] has its lowest level of debtors for the year," explains Smillie, adding that this is when similarly cash-strapped creditors are "screaming for payment". If they do not get paid, they tend to take court action in February or March.

Though this will often have the dire consequences already mentioned, it is important that company directors realise that all is not necessarily lost - provided they talk to an expert. "They still see us as undertakers. But the truth is that there is still so much they can do. What is an insoluble problem to them is an everyday thing to us," reassures Smillie. And lest anybody should think that he and his ilk are over-anxious to profit from this potential misery, he stresses that an initial consultation with an insolvency specialist should not cost anything.

The sorts of solutions that insolvency practitioners can come up with are too complex to go into in any detail here. The point is that, particularly at times like these, when signs of recovery are so often followed by downturns or periods of uncertainty, young businesses need to keep a tight rein on costs and income. And that is true even - or perhaps especially - when the going looks good.

Another lesson is the importance of keeping separate personal and business interests. Insolvency specialists frequently come across cases where business founders have sought to stave off problems by putting in their own money. This is a natural temptation for entrepreneurs, who typically have such positive outlooks that they downplay any setbacks and play up the prospects of new orders and the like, convincing themselves that they will soon be paid back. But, quite apart from causing legal complications should the business fail, this practice can often fall into the category of throwing good money after bad.

Finally, the possibility of running into such difficulties demonstrates the necessity of being adaptable and flexible - as pointed out by Bagel Street founder Danielle Downing, who has changed her business plan in an effort to survive in a highly competitive market (see adjacent).

Just as big companies often run into trouble through not being quick enough to respond to changing circumstances, the very stubbornness that helps entrepreneurial businesses get established can hold them back when it comes to, say, picking the most efficient means of financing growth.

It is encouraging, then, that research published recently by KPMG, the accountancy firm, shows that a third of companies with turnover of up to £500m believe private equity finance the most appropriate source of new funds for them - up from 17 per cent just a few months ago. This is at least indicative of more open-mindedness and greater adaptability - the sort of attributes that should prevent businesses falling foul of certain events, such as Christmas.