10 ways to avoid business insolvency

After a tough year for many business owners, the next 6 months could be crucial to your business as the country re-opens and many of the Government schemes to help business owners come to an end.

For business owners that took advantage of schemes such as furlough, deferring VAT and Bounce Back loans, time is now running out on these schemes and payments will be due in the coming months. This will increase financial pressure on businesses and the self-employed if trading hasn’t returned to normal.

So, how can you prepare now to avoid insolvency? In this blog we give you tips on how to avoid business insolvency.

How soon should I get professional help to avoid insolvency?

There isn’t a precise moment that you should get professional help, it depends on your business circumstances. But remember that the earlier you seek help and speak to someone about what’s going on in your business, the more options you may have to turn the business around and avoid insolvency.

If you’re in a situation where you are being harassed by creditors on a day-to-day basis or are just continually worrying about the situation you face, it can be difficult to concentrate on anything else. This often leads to being unable to guide the business out of trouble yourself because you’re in permanent ‘firefighting’ mode. This is where professional help can really make the difference. It could be the difference between your business going under and recovering your business, so why wait?

Also See: Company Liquidation: Voluntary Liquidation Of A Limited Company

Tackle problems quickly

Approaching potential insolvency, the key is to tackle areas quickly and with purpose to avoid insolvency. It’s sometimes possible to only take a few minor adjustments to the way you do business or deal with your own debtors that makes can make the difference between survival and insolvency.

1. Cash is king –

   Running out of cash can be a result of many different things but good cash management and forecasting can help you to identify inefficiencies, reduce uncertainty, plan, and guide your future business direction.

   One of the signs of potential insolvency is the inability to pay your bills on time. Sometimes, the first sign is the need to pay one or some of your suppliers’ invoices late. At its worst, you can have accumulated an avalanche of debt. So, always being aware of your business cash flow situation and to what to do if it declines further is crucial.

2. Identify inefficiencies –

   To identify inefficiencies in your business, you will need to collect data and ask yourself these sorts of questions:
   • How long does it take to pay suppliers invoices?
   • How long does it take for you to collect payments?
   • What costs are unnecessary,and can you make cuts that won’t damage the business?
   • How long is stock held?
   • What’s the value of WIP?

3. Reduce uncertainty & risk –

   You can’t control economic uncertainty, but you can influence and minimise uncertainty within your own business.

   The questions you should be considering:

   • Are our customers sound or are they at risk?
   • Are my suppliers sound or are they at risk?
   • What if I have issues with equipment in my business, how will I resolve it?
   • What if a key customer or supplier fails?
   • Can we diffuse our risk by spreading it across the business?
   • Are we insured for the right things?
   • Are our terms and conditions watertight?
   • Do I have sufficient working capital to meet operating costs?

   By looking at what the future holds and preparing forecasts, you can start to assess the health of your business. You should consider contingency plans earlier for any ‘what if’ scenarios.

4. Keep cash in the business –

   Keeping cash in the business is vital if you have cashflow problems. Here’s some things you can consider:
   • Consider the repayment terms on loans/funding/government schemes and understand if repayment terms can be amended.
   • Think about retaining profits within the business (if you can afford to).
   • Restrict borrowing to what is affordable.
   • Match the credit terms you offer to customers with credit terms you obtain from suppliers. Don’t allow your customers longer to pay than you are allowed by your suppliers.

5. Use the deferred VAT payments scheme –

   The Government offered help to businesses through the pandemic by allowing them to defer VAT payments and were initially given until 31 March 2021 to pay any liabilities which accumulated. However, it was further announced on 24 September 2020 that, rather than paying in full at the end of March 2021, businesses will be able to choose to make instalments over 2021-22. This offers extended help to many businesses. So, if your business is struggling and you took the VAT deferred option, we recommend you sign up for the new payment scheme being offered by the Government before the 21 June 2021.

   HMRC’s guidance sets out the deadlines for joining (to allow for Direct Debit processing) and the corresponding number of maximum instalments available (including the first payment):

   Join by	Maximum number of instalments available
   19 May 2021	9
   21 June 2021	8

6. Negotiate with HMRC –

   If HMRC is one creditor you will struggle to pay, you’ll need to negotiate some breathing space to avoid irreversible measures being taken against your company. HMRC has the power to issue notices if they suspect that a problem is not temporary, and your business can quickly be forced into liquidation by their actions.

   You may be able to set up a Time to Pay Arrangement with HMRC if you’re unable to pay taxes in full. This lets you spread the cost of your tax bill by paying what you owe in instalments. But again, tackling this before you receive a notice from HMRC is key.

7. Have a plan B –

   Have contingency plans for alternative sources of finance, alternative suppliers, alternative markets, and alternative ways of delivering products or services. This may be the difference between continuing trading and insolvency now and in the future.

8. Factor out debtors invoices –

   If outstanding debtors and chasing these invoices is an issue in your business then factoring (also known as invoice factoring), could allow your business to raise cash from your outstanding business to business invoices. The invoice factoring provider advances you an agreed percentage against your unpaid customer invoices. Factoring can be useful for improving your ongoing cash flow. It bridges the gap between completing a job and receiving payment for the work. This means you can keep up with payments.

9. Restructuring –

   Depending on your circumstances, the best course of action to avoid insolvency could be to consider restructuring or reorganisation of your business or an alternative approach to financing your business in future.

10. 10) Future strategy –

    Now could be the time to pull up your business plan and review it. Thinking about how your business and more importantly the market has evolved in the last 12 months and how it may continue to evolve, will allow you to understand how viable your business still is.

    Ask yourself these questions:

    • Is there still sufficient demand for my product/service?
    • How has the current landscape changed and does my business need to adapt to this?
    • Can I diversify or offer additional products / services to help my business survive?
    • Can I cut costs on things like property, overheads, and staff costs?

Also See: Member’s Voluntary Liquidation (MVL)

Bounce Back Loan repayments

If you’re a business owner that took advantage of the Bounce Back Loans scheme and are now approaching the 12-month point of when they started. Repayments will be due, and you’ll be starting to pay interest on your loan at a standard rate of 2.5%. If cash is running out and you’re unsure how you will make repayments, then now is the time to act.

Summary

Avoiding a full decline into insolvency may be possible, but generally requires awareness and acknowledgement that a problem exists. Ignoring the problem is not an option – you need to pinpoint the areas of concern and take fast action to address the situation to potentially recover the business.

If you’re worried about your business health and want to avoid insolvency, then seek professional help from a recovery expert who can guide you through the options available. They’ll help you to look at your forecasts and the overall viability of the business. They can advise you on what could change to improve your business position. However, they’ll also advise you if you are continuing to trade when you ought to know there’s no reasonable prospect of avoiding insolvent liquidation.

At DNS we work with recovery & insolvency experts to help you through these problems and make the right decisions for the future of your business. Contact us for help and advice.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.