How to Reduce the Threat of Insolvency
Running a business can often be challenging and a downturn in the market or the loss of a major client can result in the threat of insolvency. For some businesses, it may already be too late to avoid this however, seeking early advice from a professional, and exploring all options, may help you save the business.
In this article we examine a wide range of possible options available to directors, wishing to minimise the risk of insolvency.
Early action is the key to avoiding or surviving financial difficulties and possibly the most important step in managing a business successfully. Whether it is poor revenue growth, cost burdens or cash flow pressures, immediate action will invariably avoid the need for more drastic action later.
Talk to creditors
Creditors have a range of options open to them for enforcement and recovery of their debt, including a winding up petition if they are owed more than £750. So it is important to communicate with them as soon as payment issues arise. Giving creditors an understanding of the issues and providing them with an indication of how and when they will be paid, will help ensure that they don’t escalate their action against the company.
However, a business should not make unrealistic promises to repay and should always enter into a conversation. Honest negotiation and compromise will help maintain good relationships and a better outcome for all.
Identifying and reducing any non-essential costs should be the first place to release valuable working capital. A small reduction in costs across the board can have a significant impact. Areas to release capital short term could be advertising, research and development, non-essential training, limiting overtime hours and delaying purchasing of new equipment.
Maintain cash flow
Cash flow is the lifeblood of any business, without positive cash flow, the business will fail. Therefore, maintaining close control of cash flow is important, so ideally invoice immediately for completed work, have an effective payment collection method to realise funds and avoid overtrading by accepting work that cannot be fulfilled with current resources.
A bank loan is not the only way to raise money; there are now alternative sources of finance available to businesses. Many businesses are turning to crowd-based funding, where the business will offer a small share or product/service in return for an investment from many individuals. There is also the option to look at Peer-to-Peer (P2P) lending where individuals are matched with borrowers, normally online, to make it a cost effective borrowing and lending option.
Alternatively, there are the more traditional routes of speaking with the bank or finance lender, factoring which is where the business would sell its accounts receivable or borrowing against company assets.
Be aware of changes in the market
It is advisable to regularly research the market to keep abreast of changes and to understand how the business’ competitors are faring. There could be a change in attitude to specific services/products, new regulations or new technologies that could have a direct impact on trade. It is better to be one step ahead, plan and implement to succeed.
It can be hard at times for a business to distinguish between a temporary and terminal decline, but taking the steps above will go some way to avoiding the threat of insolvency. However, if insolvency is unavoidable, professional advice must be sought early, with regards to how to deal with the issues. This is so that the creditors’ position is not worsened and the directors limit the risk of being personally liable for the insolvency. There are a number of options to consider, primarily whether or not the business can continue to trade. If the business is viable but held back by legacy debts, then a restructure may alleviate the pressure of creditors and directors can focus on trading out of trouble. However, if the business is insolvent with no future prospects, then liquidation may be the best outcome for creditors of the company.
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Bridgewood is one of the leading debt solutions firms in the Midlands, delivering value for money solutions with a compassionate and supportive approach.