When a company becomes insolvent this means that they cannot pay their debts as and when they fall due. In other words, their liabilities are greater than their assets. If a company becomes insolvent then they can be in danger of having to close down. Insolvency can’t always be avoided – many different factors can influence a company becoming insolvent, including external factors, like a volatile economic climate. However, knowing how to keep your business on track can significantly help to reduce the risk of your company becoming insolvent. These are just a few of the most important steps for how to avoid insolvency.
Know The Warning Signs
You can’t understand how to avoid insolvency without knowing the main signs of trouble to look for. There are many different symptoms of an insolvent business, however the most common signs include the following:
- You’ve reached maximum borrowing limits
- You’re receiving demands for payments
- You’re struggling to pay staff wages
- You lack accurate financial information
If you notice any of these signs, it’s essential to contact the advice of a licensed insolvency practitioner as soon as possible. They will be able to confirm whether or not your company is in fact insolvent, and guide you through the next steps to take from there.
Analyse Your Cash Flow
A key part of how to avoid insolvency is analysing your cash flow problems in order to implement improvements. Look in detail at your current cash flow problems, highlighting where the pressure points are in order to make realistic projections for the next few months. For example, do you have unnecessary stock? Are your invoicing procedures up-to-date? Are you owed payments by customers that you could chase up? These are all important questions to ask when looking at ways to boost your cash flow.
Negotiate With Your Creditors
The key to avoiding insolvency is acting fast. As soon as you start to experience financial strain, communicate with your creditors to see if you can negotiate some breathing space. This includes talking to suppliers, subcontractors, tradespeople and even HMRC. Rather than burying your head in sand and letting payment requests build up, being transparent with creditors may enable you to negotiate more favourable terms – after all, it also benefits them to ensure that you can pay them. One business rescue option you may be able to consider is a Company Voluntary Arrangement (CVA) which is a binding contract between a company and its creditors to pay back some or all of its liabilities over a specified period of time.
Maintain Accurate Financial Information
Maintaining accurate bookkeeping in business is not only a legal requirement (it’s crucial that HMRC are able to audit a company’s finances at any point), it’s also crucial for recognising any serious problems early on. Without accurate financial records how can you get a reliable picture of how your company is really getting on? Maintaining detailed records enables you to plan for the future more accurately whilst ensuring that you can identify and address problems head on, whilst avoiding late payments. This information will also help you when looking at ways to boost your cash flow.
Reduce Overheads
Overheads are the day-to-day costs of running a business. As you can imagine, these soon add up, and so finding ways to reduce your overheads can really help to prevent companies from running into serious financial difficulty. Take a detailed look at the costs involved in your daily operations. Are there costs you could reduce? For example, could you consider a smaller office space? Could you outsource certain duties or automate certain operations in order to make your business more efficient and cost-effective? Looking at where you can cut unnecessary costs will play a big role in keeping your company stable and successful.
Seek Expert Advice
There are small steps that you can take on your own to help prevent insolvency, however the most important part of how to avoid insolvency is seeking expert advice. A business rescue expert will be able to provide an impartial assessment of your business’ situation, identifying the main stress points, and advising on how these problems can be solved. If your company is struggling, an expert can talk you through the formal business rescue proceedings that are available, or how to liquidate your company if that is the more suitable option. Seeking professional advice early on rather than burying your head in the sand, will provide your company with more options for moving forward.
For further guidance on how to avoid insolvency, or for advice on rescuing your struggling business, please don’t hesitate to get in touch with our experienced team at Ballard Business Recovery.
