Insolvent liquidations are one of the biggest worries amongst the UK's directors. That's perfectly understandable because although company insolvency does not necessarily spell the end of the business, it does bring a huge amount of stress and pressure.
Currently, the number of insolvent liquidations in the UK is down, and the rate of insolvent liquidations is at its lowest level since comparative records began in 1984. However, insolvency is still a persistent problem, particularly for the UK's small and medium-sized businesses.
Thankfully, if the warning signs are spotted early, there are a number of different strategies you can use to ease your insolvency worries. In fact, in many cases all it takes are a few small adjustments to the way you work to get your business back on track.
What is insolvent liquidation?
A business becomes insolvent when it is unable to pay its debts, either because it does not have the money to pay its bills when they fall due, or it does not have sufficient assets to cover its liabilities.Once the directors decide the company has no future then company liquidation may be your only choice.
The good news is that insolvent liquidations do not happen overnight. If you keep a close eye on your business's performance and cash-flow, you'll be able to see the signs that your finances are becoming strained.
Common warning signs of insolvency include:
- A bank overdraft that's always close to the limit;
- An inability to extend existing credit agreements or access new credit;
- The company's creditor days (how long you take to pay your suppliers) are growing;
- You are having problems paying HMRC;
- You have received HMRC late payment penalties;
- You have had numerous failed dealings with creditors;
- You are always waiting for the next big sale or debtor payment to sort the problem out.
If you recognise some of these warning signs in your business it's essential you act quickly, as the earlier you act, the greater your chance of resolving the problem.
How to avoid company insolvency
1. Take control of debtor payments
Consistent late payment of invoices is one of the biggest causes of company insolvency. This can be rectified by introducing stricter credit controls. If you have a customer that consistently pays late, could you ditch them and replace them with a customer who understands the importance of timely payments? In many cases, simply threatening to drop a customer will make them up their game. Alternatively, you could start charging interest on late payments.
2. Stop reordering so much stock
Many small and medium-sized businesses hold more stock than they need so they can fulfil customer orders quickly. However, holding too much stock is a real drain on working capital and can lead to losses if the stock remains unsold or has to be discounted. Although this may not be enough to make your business insolvent on its own, it can be the final straw when added to other problems to you might be experiencing.
3. Explore other credit options
If your business is profitable and simply experiencing a cash-flow shortfall, there are a number of alternative finance options you should explore. A turnaround practitioner or company rescue expert will be able to scrutinise your cash-flow needs and identify potential credit sources that could steer you away from trouble. Possible options include asset-based lending such as factoring and invoice discounting.
4. Improve the efficiency of your finance and administrative systems
There's nothing to say every company director needs to be a financial expert, but being able to see the 'bigger picture' in regard to your business's performance can keep you on track. At the very least, you need to know:
- Your predicted cash-flow for the next six months;
- How much money is owed by the business to its creditors;
- How much money the business is owed by its debtors;
- When tax payments need to be made;
- When tax returns need to be submitted;
- When your company accounts need to be filed.
If you do not have the time or the financial know-how to make this information available, hire an accountant who can help you stay in control.
5. Keep in contact with creditors
If you're struggling to make payments when they fall due, make sure you communicate this with your creditors rather than ignoring the problem and burying your head in the sand. Many businesses will be happy to extend their payment terms if you simply call them to explain the problem. If HMRC is one such creditor, make sure you contact them immediately and ask about a time to pay. Failing to do so will only result in late payment penalties that will exacerbate the problem.
How can we help?
If you've identified the warning signs of an impending insolvency and are worried about your ability to pay your debts when they fall due, please get in touch with our team. We can help you understand your options and find the best route back to financial fitness.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.