Making the decision to voluntarily liquidate your business can be extremely tough. But when there are clear signs that the time is right, it’s best to act as quickly and as decisively as possible to avoid making the situation any worse.
After all, keeping a suffering business registered at Companies House could worsen the eventual damage in several ways. For example, your firm could trade while insolvent, which under UK law can trigger provisions of the 1986 Insolvency Act such as section 214 – Wrongful Trading. Also, a struggling business could cause relations with clients, suppliers and staff to deteriorate. This would be especially problematic if you intend to revive the business as a phoenix company, since a fresh start will be much more difficult without key relationships.
Sometimes, as unfortunate as it is, the kindest thing to do is to be cold and act quickly. Here are five signs the time may be right to liquidate:
1. You’re late paying bills
Even if your business will have the required funds shortly, making a late payment out of necessity is not a good sign. The first time this happens, identify the cause and analyse why the situation has occurred. If it’s a short term issue or oversight which can be easily addressed, then perhaps it’s not a serious problem. But if late payment occurs again, this suggests the dilemma will be harder to resolve.
Regular late payments can exasperate your company’s plight. Supplier bills could become more expensive with interest and in some extreme cases, debt recovery costs may need to be paid. Late transactions are a growing concern among small companies, with 23% of private businesses reporting they had seen an increase in the number of late payments made to them last year.
2. You can’t pay your staff
Failing to pay staff wages on time naturally means the business either has too little money, or too many employees. As above, if the reason is not enough funds, it could be a one-off but if it does happen again, this suggests a much more serious problem. It could also result in legal action and the company could be breaking the law for withholding wages.
If the reason is that the company has too many employees, then the situation remains complicated. Making redundancies is of course an option, but can you afford them? Redundancy packages are often expensive and moreover, there is the possibility of litigation if the process is mishandled, which could lead to high legal costs and need a significant amount of time to resolve. Also, redundancies can have a negative emotional impact on the rest of the workforce too and lead to unwanted resignations.
3. Sales and investment are decreasing significantly
A drop in sales enquiries in the long term will affect your business’ ability to pay bills and staff. Therefore it is important to detect this decline as soon as possible. This is particularly important if there is a long lead time on sales, such as two to three months, as if you only realise once the sales figures are affected, you will be reacting two to three months later than desired.
The consequence of losing business from a regular client depends on how reliant your company is on income from this revenue stream. Similarly, the impact of losing investment depends on how reliant you are on external funding. If you are highly dependent on repeat business or investment and have no reliable backup plan, then your company is likely to suffer.
4. Your accounting is frequently late
This can be a knock-on effect from financial difficulties, as time spent trying to resolve cash flow issues can cause admin to be neglected. However, deliberately putting off accounting responsibilities is also a sign that the business is struggling, as it suggests the results will look unhealthy.
Delaying accounting will not make the problems go away and can worsen the situation too, as the penalties for late filing can reach over £1600 in 12 months.
5. You need to sell assets
Sometimes selling assets makes sense, particularly if they fetch a good price or have proven to be unprofitable. However, if assets need to be sold out of necessity, this should serve as a warning sign. If sales are required to make ends meet in the short term, such as for paying monthly wages, then the issue is particularly serious.
The first time you see any of these signs, analyse the reasons behind them. Does the situation look like a one-off? Is it voluntary or forced? Once you see one of these signs more than once in quick succession, or two signs at the same time, then it’s definitely time to take some advice.
We’d be happy to have a no obligation chat with you to talk through your situation. Your business may not be insolvent yet but at the very least, you need to plan ahead and be prepared to react quickly in case matters do become worse.