Guide to Avoiding Insolvency & Business Recovery

When your company is in financial turmoil, you can’t just ignore it and hope that it goes away.

As bad as you think things are now, it can get a whole lot worse if you allow your business to drift into insolvency. It’s much easier to avoid insolvency than it is to get out of insolvency.

This Guide to Avoiding Insolvency will help you diagnose any financial problems in your company and take action to find a path to business recovery, and avoid insolvency before it’s too late.

For more advice on business recovery, managing business debts or to discuss any other insolvency option, speak to our Licensed Insolvency Practitioner Tom Fox. Call: 0800 611 8888.

Is my company insolvent?

The first thing you need to do is find out if your company is actually insolvent. A company is deemed to be insolvent if it is unable to pay its debts as and when they are due, or the value of its debts are larger than the total value of its assets (i.e. it has a negative balance sheet).

If your company is insolvent, it means that it can’t pay its debts. It also means that you – as director – have a legal responsibility to protect the creditors’ interests. Failing to do this could result in you being banned from holding a directorship.

If you’re happy that the company isn’t insolvent, then your next steps should be to evaluate the size of your company’s financial problem to try and figure out what’s causing the problems.

Review your finances

It is usually best to have a trained eye review your finances. We recommend speaking to your accountant or a Licensed Insolvency Practitioner. But, if you want to do it yourself, you should start with a cash flow test and a balance sheet test.

Review your cash flow

In business, cash is king. A cash flow test measures whether you have enough cash on hand to pay all of your debts when they are due (or within a reasonable amount of time). If you can’t, then you may already be insolvent.

Many otherwise profitable businesses are pushed to the edge of insolvency by short-term cash flow issues. Temporary cash flow problems can include:

  • Seasonal peaks and troughs
  • Additional tax payments
  • Non-payment of debts
  • Issues with suppliers

Review your balance sheet

Generally, we think of an insolvent company as one that can’t pay its bills on time. However, there is another definition of insolvency, where total debts outweigh total assets.

A company can be insolvent on its balance sheet if it can afford to pay bills for the time being, but there is a much larger bill on the horizon that it can’t afford to pay at this time.

A balance sheet test looks at your assets and liabilities to evaluate your company’s financial health.

Business finance warning signs

If you don’t have the technical skills to carry out a cash flow or balance sheet test, then you can instead try looking out for these more general warning signs:

  • Your business bank account is always close to its overdraft limit
  • Your business is unable to extend existing credit agreements or access new credit
  • It is taking longer to pay suppliers
  • Creditors are calling your business regularly
  • Your business is having problems with HMRC
  • Your business is reliant on occasional big sales to keep going
  • Your business is having problems getting stock because of unpaid debts

Action to avoid insolvency – Small business debt recovery

If you can see signs of financial trouble and you know where the problems lie, then you should act quickly to try and avoid insolvency. Here are some practical tips that you can use to avoid insolvency.

Selling under-utilised assets

If your business is cash poor but assets rich, then selling underused assets can help you avoid insolvency and help business recovery. Examples of under-utilised assets could include:

  • Equipment or machinery that you don’t use
  • Property or space that you don’t use

You can also explore asset financing as a way to free up cash quickly.

Reduce inventory

Lots of business have cash tied up in stock. Making sure your business has just enough stock to fill orders can help your business operate more efficiently. This isn’t always easy to do, but it helps if you have reliable suppliers.

Renegotiating payment terms

Over generous payment terms could be handicapping your business. Renegotiating payment terms with existing customers is one of the easiest things you can do to help business recovery by addressing a cash flow problem

Change your invoicing and payments procedures

If you have a problem with late-paying clients, there are things that you can do to try and speed up the payment. Often it can be as simple as re-evaluating your invoicing and payments processes. Actions you can take include:

  • Sending automatic invoice reminders
  • Setting reminders to chase unpaid invoices
  • Introducing financial penalties for late payments
  • Taking recovery action against unpaid debt
  • Exploring invoice financing

Funding solutions for small business debt recovery

Sometimes, some additional finance is all you need to steer your business through a tricky period towards business recovery. There are a wide range of different funding options available and it pays to do your research and choose the right one for your business. Some examples include:

  • Government grants, low-cost loans and other support
  • HMRC tax deferrals
  • Invoice financing
  • Asset financing
  • Loans
  • Funding from directors or family and friends

Speak to your accountant more regularly

It might sound obvious, but your accountant knows more about this area than you do. They will be able to give you updates and insights that you just wouldn’t have access to on your own.

Reduce costs to help business recovery

Most businesses can make cost savings across their business. Examples of soft expenditure that can be cut more easily include:

  • Research and development costs
  • Marketing costs
  • Business services costs

Reduce staffing costs

Staffing costs can be harder to cut because there is a human element involved. But if staffing is a significant portion of your overall budget then you may have no other choice.

If you act to address staffing costs, you may be able to avoid making mass staff cuts and redundancies if you make ‘softer’ cuts easier. Some examples of ‘softer’ staffing cuts include:

  • Reducing overtime
  • Reducing bonuses and benefits
  • Delaying new hires

Cut off toxic customers and suppliers

We all have customers and suppliers from hell. Continuing to deal with these actors exposes your business to more risk. You might consider cutting off a customer or supplier if:

  • They are a routine late payer
  • Dealing with them takes up too much time
  • You can’t rely on a supplier to deliver when it really matters

Keep cash in house

If you think you are facing a cashflow problem then you should try and hold onto it as much cash as possible. Actions could include:

  • Retaining more profits within the business
  • Restricting borrowing as much as possible
  • Renegotiating supplier payment terms

Negotiate with HMRC and other suppliers

If you are struggling to make repayments, your creditors may be willing to give you some breathing space to avoid measures like insolvency. If you owe money to HMRC, you may be able to set up a Time to Pay Arrangement to spread the cost of your tax bill.

Restructuring and insolvency to help small business debt recovery

Insolvency doesn’t have to mean the end of the road for your business. There are a wide range of business recovery options available to businesses and the action can be the start of a new, better company.

If you have deemed your company is insolvent, it’s important that you seek professional advice as soon as possible and work with a Licensed Insolvency Practitioner on your best course of action.

We hope our Guide To Avoiding Insolvency was useful to help your business recovery. If you would like a FREE CONSULTATION* with an Umbrella.UK licensed insolvency practitioner to discuss your company’s situation, please call 0800 611 8888

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