What options do directors have?

We have previously touched on the 2017 insolvency figures, recording a rise in the number of total insolvencies across the country. However, the latest research suggests there is, as of yet, no signs of improvement for companies in the UK. According to a report from R3 – investigating the extent to which company liquidation can  happen across the same industry – over a quarter of UK businesses have suffered a hit to their cash flow, following on from the insolvency of a customer.

The figures seem to signify a ‘domino effect’, felt in many regions across the UK. For instance, more than a fifth of Northern firms have taken a blow to their finances, describing the financial impact of insolvency on a customer/supplier as ‘very negative’.

In the first quarter of 2018, the total number of insolvencies climbed 13% from 2017. Similarly, the Carillion liquidation highlighted an urgency for companies to take stock of their finances, with record numbers of firms seeking insolvency advice in the wake.

Industries suffering issues

With the news of the Carillion liquidation, it’s no surprise the construction industry is facing severe challenges. Construction companies are the industries most likely to suffer a negative impact due to the knock-on effects of liquidation.

Almost half surveyed in the report by R3 recorded a loss. The fall in spending and weaker growth on house prices could be to blame. Similarly, as could a large number of firms competing for fewer jobs. More information on the construction industry and the potential issues and options for business rescue can be found here.

The retail industry has also hit the headlines quite consistently, with Poundworld the latest casualty of the high street. Poundworld is set to disappear from the high street as they announced their final shop closures, with over 2,500 employees said to be affected. The company entered administration in June, with administrators still communicating with interested parties regarding the sale of the business.

Poundworld is not the only casualty in the retail industry, with Toys R Us creating a ripple effect in early 2018. Similarly, House of Fraser and New Look began closing low-value stores in an attempt to ride the insolvency wave. These issues have also resulted in a huge number of job losses. The Press Association revealing that over 50,000 jobs have been lost or put under immense pressure due to the struggles of Britain’s retail sector.

What is contributing to company insolvency?

There are many factors that could see a company face the potential early signs of insolvency. Heightened levels of inflation and an increase in business rates expenses have been reported as a cause for thousands of high street retailers. However, business rates are not, generally, the sole reason for liquidation, but a contributing factor. The lack of growth in wages and the economy as a whole is another consideration, especially as more consumers have less money to spend. This creates the perfect storm for company insolvency; one that we are seeing today.

Similarly, we are seeing a large number of businesses take on too many contracts without the necessary resources. This was, in particular, the root cause for the Carillion liquidation. In July 2016, Carillion’s market value stood at £1 billion, with jobs in Canada, the Middle East and even the Caribbean. However, as they took on more contracts, many became unprofitable. Thus, investigations began into their contracts, resulting in their market value falling to £61 million.

We have also seen the food and beverage industry face the same issues, with restaurant franchise, Carluccio’s, considering restructuring options. Likewise, Byron – the upmarket burger chain – entering into a company voluntary arrangement to cut costs and most recently, Gaucho and Cau preparing to file for administration.

What are my options?

While the insolvency figures certainly make for hard reading, all is not lost. Catching the problem as early as possible gives the greatest chance of business recovery. There are early signs of company insolvency to watch out for, and you can find those here.

For businesses that do suffer cash flow issues or seemingly reach their credit limit each month, insolvency advice is your next step. Many companies bury their heads in the sand and seek insolvency advice at the last possible stage, often resulting in the complete dissolution of the company. Take the example of Kids Company, who ignored all warnings and eventually faced a winding up petition from several creditors.

There are alternative finance methods you should consider, such as invoice and asset finance, as well as working capital loans. Similarly, look to similar businesses within your industry and consider the possibilities of a merger. A merger is particularly great for those companies that are already suffering a loss in reputation due to financial struggles, with the merger helping to reassure potential consumers.

If the above options are not possible, we suggest you find an insolvency practitioner (IP) to discuss debt management advice. When you do find an insolvency practitioner, they will work to provide the best possible solution for your business. If a CVA is possible, the insolvency practitioner will put together realistic monthly repayments for your creditors, enabling you to continue to trade. However, if an arrangement with creditors cannot be achieved, the IP will work in the best interests of your company.

Seeking immediate debt management advice is critical for companies facing cash flow issues. Also, speak to peers within your industry and accountants to pull together a realistic and achievable forecast, to avoid any of the above issues.

Our BusinessRescueExperts can do all of that, and provide initial free, confidential insolvency advice.