Methods To Avoid Business Insolvency

Methods To Avoid Business Insolvency
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A firm’s primary objective is to make a profit. Profits are generated via sales revenue. The amount of the profit is the difference between the money coming in – the income – and the money going out – the costs. When businesses don’t earn profits for an extended period – or a short period, if there are no reserves – it leads to insolvency or bankruptcy.

Some reasons for lack of profitability are:

  1. Market conditions – the economy follows a boom and bust cycle of rapid expansion followed by troughs or recessions. During bust periods, consumer confidence and spending tend to decline, leading to a contraction in revenue.
  2. Poor decision-making – lack of knowledge and being inexperienced in finance and management can increase the probability of poor decisions, but no company is immune to making mistakes.
  3. Criminal activity and natural disasters like floods, storms, and fires can also cause bankruptcy problems.

Some of the situations that create business insolvency could be avoided while can mitigate the effects of others.

Here are some steps you could take:

Reduce your overheads

Every firm has overheads. While reducing them can be a complex process, it can be done and sometimes must be. You have to spend a little to save a lot at times potentially.

Here are some suggestions:

  • Hire an accountant hiring a professional accountant to control your finances is one of the most effective ways to reduce costs in the long term. Would improve accuracy and costly financial errors avoided – and your accountant can also help you figure out potential tax deductions that could increase your profits.
  • Identify the crucial functions – the most critical factor is identifying what functions and roles are essential to your business. Once you have done that, you can look at other areas where you could possibly make cuts.
  • Outsourcing – outsourcing specific duties and responsibilities can help you fill up staff gaps without funding full-time wages. It also means you save on the cost of office supplies and other overhead expenses.
  • Review planned investments – if you are planning to purchase goods or services to grow the business, examine whether the payoff timeline is worth it now. Likewise, if you have any equipment or plant purchases lined up, evaluate your options – can they be leased rather than purchased outright?
  • Rent instead of buy – buying equipment for your company is a considerable investment. If you’d instead not use the cash, you can rent or lease instead. This allows you to utilise the equipment without worrying about upfront payments, maintenance, or repairs.

Analyse and boost your firm’s cash flow

Even profitable companies can run into cash flow issues.

If your current financial problems are a result of reduced income, then there are some approaches that you can use to try and unclog your incoming payments and get the cash flowing into your accounts again.

Consider the following:

  • The value of unnecessary or underused stocks or other assets is depreciated, so if they are not being utilised, maybe they could be sold to inject some more liquidity into your business.
  • Have a look at your payment terms and invoicing procedures. See if you can arrange better payment terms with existing customers and ensure that you are invoicing regularly, on time, and accurately.
  • If customers or suppliers owe you money, take action to recover it, especially if the debt is long outstanding.
  • If you are anticipating bills and payment demands landing on your desk and know you can’t meet them, call your suppliers and arrange extensions with them, or see if you can adjust your payment and credit limits.

Get expert advice

You know better than anyone how severe issues can affect your company. Still, even the best companies seek professional advice and guidance from time to time – whether it’s to confirm their intuition or to see what a fresh view of their business landscape could reveal.

Budget and financial advisers can provide you with a better understanding of where your cash is going. They’ll help you with tips and proposals on how to cut out unnecessary costs and reduce expenses.

There is often free assistance available, too. You could:

  • Ask a budget adviser or financial consultant for recommendations on how you could control your debts.
  • Ask a budget adviser or financial consultant for help negotiating with your creditors.
  • Talk to a mortgage broker to see if you can get a better deal on your mortgage.

Negotiate with creditors

Whether it’s suppliers, subcontractors, tradespeople or even HMRC, it is essential you speak with any creditor as soon as you can to arrange some breathing space.

It can be easy to disregard a financial downturn as a blip and be convinced things will turn around by themselves soon enough, but they might not. It’s potentially dangerous to bury your head in the sand and ignore requests for payment from creditors.

The sooner you open a dialogue with creditors, the better. You may be able to negotiate more time to pay and perhaps more favourable terms while you work on improving your business’s financial condition.

Consider a debt management plan

You may be able to combine all your debts into what’s called a debt management plan or creditors’ pool. With this, you make payments into the plan, and your creditors are paid from it. Your creditors have to agree to this.

If they do, you could avoid entering into standard insolvency procedures.

When evaluating your debt repayment strategy, prioritise secured debt (such as a loan secured on a piece of equipment) and high-interest debt. If you can, avoid unsecured debt (such as credit card debt) altogether. In any loan or financing arrangement, negotiate the best terms possible, and make sure to get everything in writing.

Review insurance policies

Insurance is a significant expense for most businesses. Whether it’s health, disability, property or something else, premiums go up every year and draw cash flow away from what are arguably more productive uses.

There are also numerous life insurance options to consider. Term insurance is cheaper, but a whole life policy offers you the opportunity to borrow against its cash value. Again, you should consult with your agent to determine your needs and the best way to meet them, based on your personal circumstances.

For expert advice regarding cash flow, overheads, mortgages, insurance, debt management plans and more, contact our team on +44 20 3011 1898.

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