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How to Reduce the Threat of Insolvency

Introduction

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 insolvency, however, seeking early advice from an Insolvency Practitioner, and exploring all available options, may help rescue a business that has got itself into difficulty.

In this article, we examine a number of options available to directors, wishing to reduce the threat of insolvency.

Early Action

Early action is the key to avoiding or surviving financial difficulties and is possibly the most important step in managing a business successfully.  Whether it is poor revenue growth, cost burdens, bad debts or cash flow pressures, immediate action may 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 issuing 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 facing your business and providing them with an indication of how and when they will be paid, will help ensure that they do not escalate their action against your company.

However, a business should not make unrealistic promises to pay and should always enter into a frank and honest conversation. Honest negotiation and compromise will help maintain good relationships and hopefully ensure a better outcome for all.

Reduce Overheads

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 or other investments.

Maintain Cash Flow

Cash flow is the lifeblood of any business. Without positive cash flow, the business will fail. Maintaining close control of cash flow is important, so 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. Also seek to maximise credit terms with suppliers to ease cash flow pressures throughout each month.

Additional Finance

A loan is not the only way to raise money; there are now alternative sources of finance available to businesses. Many businesses are turning to alternative funding methods including 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 of Peer-to-Peer (P2P) lending where individuals are matched with borrowers, normally online, for cost effective borrowing and lending.

Alternatively, there are the more traditional routes such as speaking with banks or finance houses, or by factoring debtors where the business sells its accounts receivable or borrowing against company assets in return for a fixed percentage of debtors being paid monthly by the factoring company. However it should be noted that the factoring company are likely to want a charge over some, or all of the company’s assets.

Be Aware of Changes in the Market

It is advisable to regularly research the market in which the company operates to keep abreast of changes and to understand how your competitors are faring. There could be a change in public 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.

Summary

It can be hard at times for a business to identify critical risks and 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 as soon as possible to deal with the issues. This is to ensure that the creditors’ position is not worsened and the directors limit the risk of being made personally liable for the company debts. There are a number of options to consider, primarily whether or not the business can reasonably continue to trade. If the business is viable but held back by legacy debts, then a formal restructure may alleviate the position and directors can focus on trading out of trouble.  However, if the business is insolvent with no future prospect of success, then liquidation may be the best outcome for creditors of the company, as well as its directors.

If you believe that a company is in difficulty but can be rescued as a going concern, read our articles on the Administration process or on CVAs.

About the Author

Louise Freestone

Louise Freestone is a Licensed Insolvency Practitioner with 12 years of experience in restructuring, turnaround and insolvency. She leads Bridgewood's corporate insolvency team.

View Louise's Profile and Contact Information

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