Build an insolvency early-warning system
But what are the signs?
Every business has ups and downs but in our experience there are some common, unmistakable warnings that, taken together, can indicate that a business is off course and heading for rocks:
- Not having the full business picture
Some financial records are more informative than others. A healthy understanding of profit and loss is essential but there are several other indicators of businesses health that you need to be equally adept at interpreting.
Cash flow forecasts and figures, sales forecasts, debtor reports and bank reconciliations will give you a broader understanding of where your business is and where it could be going in the coming days, weeks and months.
As a director, you need to be able to access this up-to-date information, whenever you need to if you are able to make business decisions with full confidence. Without a clear view of what you owe and are owed, you may be blinded to any unforeseen consequences of your choices. For instance, if you offered over-generous flexible payment terms to secure a new contract, this could end up working against you if you then discovered you need quicker payment.
- Constantly bumping up against your borrowing limits
Reaching the credit limit in any account can happen, that’s why they have them, but if it happens regularly and/or with more than one account then it’s another warning signal.
Other factors could include being refused extensions to credit limits or extra credit and lenders requiring personal guarantees for finance or charges on assets. All of these could be additional signs of trouble, especially if you don’t have assets which can be used against loans.
- Creditors frequently demanding payment
Constantly being chased for payment isn’t a good look for any business. If you receive a Statutory Demand from a creditor because of unpaid bills, then you could be liable to face a winding-up petition if this demand can’t be settled.
This would put a company in significant danger of closure. Also once instructed to pay by way of a formal court order, there could be substantial late payment fees added to the amount making the situation worse still.
- Your clients are paying late or not at all
As we’ve discussed, businesses can go through peaks and troughs and you may occasionally have a customer or client who pays late or misses a payment schedule entirely. While none of these occurrences are your fault, they can become a problem for your business.
If you aren’t being paid, then you won’t be able to make your own payments. We’ve covered this previously in a post about how to manage cash flow when clients pay late which gives some tips on what to do to recoup these amounts.
Why get advice?
Being a Director isn’t just a great job with a fancy title, a parking space and a bigger paypacket – it involves statutory responsibilities for you to execute on behalf of staff, creditors and shareholders.
If you’re seeing any of these individual issues occur regularly or altogether then it might be a good time to get some professional advice. Any one of these could be due to any internal or external factor such as inefficient business functions, staff absence or mistakes or they could be symptoms of a wider weakness within the business as a whole.
Business Rescue Expert are an experienced, qualified team who are on hand to help determine the root cause of your business issues and can provide you with the help, advice and solutions to diagnose and fix the problems and help you keep your business lively and alive.
- Reducing the risk of insolvency
Insolvency is never a certainty. The earlier the possibility is acknowledged, the more options and alternatives are available for you to explore and implement to avert the eventuality.
- Improved cash flow
If a business is at risk of insolvency then the simplest way to alleviate that pressure is to increase incoming cash. Like blood in the human body, cash flow is the circulation that keeps a the heart of a business beating strongly. The stronger the flow, the more resistant to external problems and pressures.
Some simple tweaks to regular business operations can improve things. Processing invoices and payments when they occur rather than waiting until the end of the month; staying on top of debts owed to you and collecting frequently; not allowing excess stock to build up and keeping an accurate forecast of all cash flow based on existing in and out payments to ensure that every decision is evidence based on existing circumstances.
- Examine expenses
A petty cash box is one thing but regular business expenditure is another. Develop a system and discipline of logging each and every purchase so you can clearly see if there are any regular and unnecessary costs that aren’t benefiting the business. These can include membership and licence fees for services you no longer use. Studying them can give you an insight into where efficiencies and savings can be made.
Even small reductions in expenditure can add up to a big impact over time, especially if they are implemented company-wide.
- Funding options
Banks are only one option when it comes to business financing. Depending on your situation and asset base, there are other choices including factoring agreements to help you secure payments.
For example, this option will help you maintain a cash flow by sacrificing a small percentage of your costs to obtain it. This must be preferable to incurring further debt with lenders or existing creditors.
- It’s good to talk
Maintaining a regular dialogue with creditors is essential in straitened financial times. One of the biggest and avoidable mistakes is to close down communication with creditors in difficult times. You might save face and pride but you will raise red flags on their behalf, exhaust any goodwill and the benefit of the doubt and make it more likely that they will resort to formal legal methods to obtain their owed debts.
Creditors will appreciate knowing in advance if your payment is going to be late and will be more likely to work with you and negotiate on payment dates and terms if you give advance notice and a clear indication of when and how you’ll be able to clear any debts. After all, they’re in business too and understand fluctuations in fortune and circumstances.
Building and maintaining a good relationship with creditors is essential in reducing the risks of insolvency especially when a winding-up petition can be brought against a company owing as little as £750.
- This is not a drill
Despite taking the proper decisions and right actions, sometimes it’s not enough and a business will become insolvent. There are still actions that a director has to reasonably take and will help them personally and professionally in the long run as the process follows its due course.
Here are some steps to help maintain your reputation and fulfill your legal duties to help insolvency practitioners work through their tasks efficiently and easily:
- If in doubt, tell the truth
Honesty is always the best policy, especially when it comes to dealing with creditors. Letting them know the situation and that you will do your utmost to secure their funds will do a lot to cementing goodwill and building trust with them. Depending on how the situation unfolds, you may need to rely on the better angels of their nature and having a good relationship with them in advance is one less variable to complicate matters.
- Keep everything
Keeping up-to-date, clear financial and business records should be a standard business practice but is utterly essential in any insolvency situation. Records of meetings, available information and decisions made on that basis will allow insolvency practitioners to understand the timescale of what happened, when, where and why and prove that you did your best to monitor issues and implement correct solutions wherever possible.
- Don’t dig further down
If you already have excess debt then it can be tempting to assume that taking on a little more at this stage won’t make any difference, especially if it allows you to make one more payment and buy a little time so that things might turn around.
Don’t. The more debt you accrue means the more you will have to pay back later and your business has already reached the end of the line. Taking on more funds now not only won’t help but could cause legal issues when you’re unable to pay and investigators look into the circumstances surrounding the new debt.
- Protect your assets
The business assets you own and control are your most important advantages now and have to be protected and insured correctly. They can be presented as a means of payment to creditors if they are willing to accept them and will help your case.
Do not be tempted to sell these assets to gain additional funds as investigators usually consider this wilful misconduct at best.
- Get professional help – quickly
Events might seem stressful and overwhelming but this is because you are not used to insolvency. The experienced team at Business Rescue Expert have been through hundreds of processes and will have dealt with every eventuality and circumstance you can imagine, and more you can’t.
The need for transparency and accuracy now is critical, just when you are at your limits. There are significant legal complications that can arise if mistakes are made in the process, even accidentally.
If your business is at the point of insolvency or by reading this article you realise it is closer than you thought then you need to take action. Call in the professionals and get some specialist advice to see if your business is recoverable, what steps need to happen to achieve this or whether insolvency procedures need to begin.
Fortunately the first step is the easiest.
Business Rescue Expert offers a free initial consultation to talk through your business’s unique circumstances and give their opinion based on the facts.
Voluntary Liquidation Quote
How much will it cost to liquidate your business?
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Liquidation is likely to crystallise any outstanding personal guarantees, so you will need to consider carefully how to deal with these prior to liquidating. There are options available that we are happy to discuss, but it is important to understand the potential effects of the guarantees prior to liquidating.
We can organise attendance at your premises to assist with staff redundancies. There is an added charge of £350 for this (already included in your quote). We find that it can really help staff move their claims forwards, and understand the procedure better. Where possible, we work with the local Job Centre so that exiting staff are aware of training opportunities and the most efficient ways of making benefit claims.
Buying assets from the liquidator
Please contact our office or book an appointment if you want to buy assets back from the liquidator. Once we have details of your assets, we can organise independent valuers to review (either on paper or by site visit, depending on the asset types), and we can then agree a fair figure for the purchase.
It may be possible to pay for the assets over a period of time, though it is likely that security would be required.