UK consumer spending is rising, unemployment rate is falling, and the overall number of company insolvencies is decreasing – yet, no company is immune to financial distress despite all the positive signs of the booming UK economy.
So if you are worried about your company’s financial state, we have prepared some advice on how to avoid insolvency and to help your company grow.
What Is Insolvency?
Insolvency is when a business cannot pay debts or the assets of this business are worth less than its debts. Any company can be winded up if it cannot pay debts of more than £750.
What Is The Biggest Enemy Of A Solvent Business?
The key pillars of a solvent company are a healthy cash flow and flexible relationships with your creditors. Without exaggeration, a cash flow problem is probably the major reason of a company experiencing distress. You can cut the company’s expenses or solve its operational problems – but if the cash flow stops, the business stops.
How to Avoid Insolvency?
It is a director’s primary responsibility to review the company’s financial position to assess whether the company is solvent. The early signs of financial problems can come from anywhere: a growing list of unpaid invoices from customers or inability of a business to pay creditors on time. You can follow these steps to keep your cash flow healthy and run your business competitively:
- Have a formal updated business plan and forecasts to analyse and compare your financial performance and to spot early signs of financial problems;
- Invoice your customers promptly and regularly;
- Review your accounts receivable daily and chase up debts owed to you;
- Avoid overtrading by only accepting orders you can fulfil as it may increase your debts;
- Monitor and reduce unnecessary stock;
- Review expenses and reduce them where possible, especially watch fixed costs such as your employees. If your company is experiencing financial problems, redundancies will be unavoidable or you can hire your staff on a part-time basis;
- Consider relocating and stop any investments;
- Sell a part of your business or release capital from non-essential assets;
- Renegotiate credit and payment terms with your main suppliers and creditors, including your bank;
- Stay on top of the trends in your industry and adjust your strategy to win competition by adopting new technologies, seeking new target markets and offering new products;
- Seek professional advice as soon as possible from a licensed insolvency practitioner.
This list is not exhaustive, and your business may need a tailored solution to avoid financial distress. If you need professional help or liquidation guidance, please, do get in touch.