Many business owners easily miss the tell-tale signs of insolvency. Whether you look after the finances yourself or employ someone else to do it, the chances are that you’ve got many more pressing issues to deal with than a missed payment or two, to your suppliers.
However, relationships between businesses can make or break business success in many industries. So when your suppliers begin cancelling your credit agreements, it might make you sit up and take a look at your accounts. At this point, how do you recognise that you’ve gone from having poor cash flow to being on the edge of insolvency?
In fact, what does insolvency really mean?
When a business is insolvent it means that it doesn’t have the funds available to cover its outgoings and debts. If your business is insolvent, it means that you owe more than you are able to pay for.
Giveaway signs of insolvency
- You are not able to pay your suppliers on time
If you start missing payments to suppliers, it will only be a matter of time before they start chasing you for payment or changing your payment terms; including taking away any credit arrangements.
- You can’t pay yourself or your staff
If you simply don’t have the money for wages, a pay freeze for Directors might seem like it’s not a big deal if it’s promised that it will only happen that one time, but for your business’ financial position to have become bad enough for non-payment or a freeze on wages, you need to recognise it as the big red warning sign that it is.
- You can’t borrow any more money
Your business accounts will be maxed out and any credit or borrowing arrangements at their maximum. It’s at this point that it becomes difficult to bury your head in the sand, as without any inwards cash flow it becomes difficult to do anything except fall deeper into debt.
- You have received final demands for payment or have been threatened with legal action
Often a wake-up call, when your business is threatened with eviction, loss of utilities or loss of supplies, the answer is not to cut ties and build a new business relationship with someone else. If it reaches the point where a legal claim is made against your business, it can often result in involuntary liquidation, as paying the legal costs to counter the claim can be far more expensive than it would have been to pay your business’ outstanding debts.
How do businesses become insolvent?
One of the most common reasons for business insolvency is when a business is regularly not being paid on time for the products or services that it supplies. Cash flow relies on money coming in for money to be able to be paid out, so a few missed payments from customers or clients may not seem like a big issue at the time, but non-payment is unpredictable and when one non-payment becomes five, it can have a huge impact when you still have committed outgoings.
If you are aware that your customers or clients are continually not paying on time, your business needs an action plan in place to retrieve the money it is owed. If you don’t know where to start with this, ask for help – it’s important.
Another common reason for insolvency is when businesses have poor management account information. Without accurate cash flow forecasts, bank reconciliations and debtor reports there is no effective way for you to actually know what is coming in and going out, regardless of whether it’s coming in and out on time or not. Similarly, if your accounts aren’t being filed on time, it’s a key indicator that something is going wrong.
What can you do if you recognise these signs in your business?
If you recognise one or more of these signs in your business, hopefully it will be at a stage where system driven processes and re-education will be the answer to preventing insolvency. Ideally, you should lead by example so that if you are relying on other members of staff to drive your accounting function and to process payments, they will understand the importance of this function whilst being bought in to focusing on the long-term future of the business.
If your business is approaching insolvency, the best thing to do is often to enter into a Creditors’ Voluntary Liquidation (CVL) which is usually the easiest way to arrange for your business’ debts to be paid in the shortest amount of time, leaving you and any other Directors able to move on to greener pastures. The Liquidation Advice Centre demonstrates what happens in a Creditors’ Voluntary Liquidation in a useful infographic.
How can you prevent this happening to your business?
The simple answer to this is to involve the right people to support you with your business as soon as you become too busy to stay on top of every little detail yourself. An accountant, for example, will be able to help you plan the best way for your accounts to work for you. Remember, as a business owner you do not need to know how to actually do everything, but you should know the right questions to ask – like being able to ask your accountant whether you are cash or accrual based.
In the end, to prevent your business eventually becoming insolvent, you should ensure that systems are in place so that your business can exist without your constant intervention. You guide, it runs. You shouldn’t be working 24/7 in your business, and it shouldn’t collapse around you as soon as you take a break.
I’m definitely headed for insolvency. Who can help me?
If you are facing insolvency, The Liquidation Advice Centre aims to provide expert business liquidation advice for directors facing financial difficulty. Their offering states that they will handle insolvency issues properly and with sensitivity so that clients are able to put a stop to situations becoming worse, which in turn enables them to regain control.
This article was contributed by Hannah Wellings from The Liquidation Advice Centre, who provide business advice about insolvency for directors of businesses facing financial difficulty.
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