I did this blog as a presentation to a networking group which I have been part of for over two years.
It went so well with lots of questions around the term insolvency and its definition and a whole raft of things which go hand in hand with it.
The following is a list of things you need to be looking out for which can lead to a Company being Insolvent. People tend to look at cash flow and creditors as the two top things which they worry about BUT there are so many other things to look out for. Sometimes it looks as if the company is doing well but it’s important to review other risks on a regular basis.
So here’s a whistle stop tour of the top ten things in my opinion.
1. Cash flow
This is one of the main causes of Insolvency. Cash or lack of it. Financial planning is so important. So many directors I have represented over the years shy away from looking at their finances on a weekly basis . There’s a psychological affect of looking at the numbers which makes them feel shiiite OR on the plus side too much money which makes them feel they haven’t invested well.
Your sales will fluctuate on a month-by-month basis AND so it is crucial to have a back up plan to ensure your regular costs – rent, rates, staff cots, vat (if you’re registered for VAT) tax (putting aside sufficient funds into a separate bank account monthly for your end of year Self-assessment tax and Corporation tax is a MUST!)
Always have a backup plan for the quiet times in your business.
2. Failing to separate business and personal accounts
This really should be Number 1.
So many directors can’t or won’t believe in the difference between COMPANY funds and PERSONAL funds. They think that all the money in the Company is theirs to spend as they choose to and so they fail miserably when it comes to dealing with tax matters as they haven’t been able to emotionally separate themselves from Company and personal money).
I come across situations time and time again where directors have injected monies from personal bank loans , credit card monies and releasing equity from their property to put into the business to keep it afloat. That’s because they haven’t really got the hang of putting aside monies from the business….. specifically for business use!
On the other side of the coin, they continue to take monies out of the company, monthly and sometimes even more regularly than that and then at the yearend they are told by the accountant that they have an overdrawn Directors Loan Account (DLA). This means that they have taken more money out of the business then they are due form the profits of the company. DLA is a complex matter to go through in this talk, but I would strongly recommend everyone at the end of this meeting to have a conversation with their accountant in relation to the status of their DLAs. OR just review it yourself if you are good with numbers. Trust me you’ll be pleasantly surprised. It’s easy to do using an excel spreadsheet.
Carry out a review of your DLA every month. Honestly every month!! Quick glance is all you need to do and if things don’t feel right then a quick call to your accountant.
3. Financial information
If you don’t have reliable financial information in front of you in relation to where your business is likely to be in the next 3 years, then I would suggest that you start working on a plan . A financial plan . A 3-year forecast is sort of the norm.
A solid understanding of the numbers will prepare you for the inevitable. Maybe NOT the pandemic BUT it certainly would have helped. How else would you know how your business doing?
I am a visual person. I like to see the numbers , the business plan, the vison in 3 years’ time. All of this is very important to me, and I make time daily to weekly to review it. It’s a great mental health check. Makes me feel in control.
4. Budgeting
This goes hand in hand with financial information in my previous point. If your accounts show that the profits are deteriorating on a year-by-year basis then this could lead to insolvency on a negative balance sheet basis. We say this is balance sheet insolvency when reviewing a set of accounts of a company which may be in financial difficulty.
The other method of determining insolvency is being unable to pay your debts as and when they fall due. Again, this is another presentation entirely.
If you are struggling to make ends meet, then you need to be looking at your overheads on a regular basis too. If the money coming in is reducing, then YOU also need to reduce your overheads as failing to do this will take you down the road of further financial difficulty.
SO, budgets are even more important too.
5. Too many debts
Debt repayments need to be managed. Taking out too many loans and continued increase in overdrafts is another cause of insolvency. Quite often it is the creditor for instance a bank who has lent the money/other creditors who will demand the repayment of a loan and will instigate legal proceedings. Don’t let them be in control of your Company.
Too many loans can make the business vulnerable as you are trading with other people’s money and so they have control over what happens when you can’t afford to make repayments.
Making assumptions (so many of my clients do this) that the business will make the money going forward is very risky. It is important to have clear insights into the business and its affordability. The future is risky and borrowing money without any accurate insight into whether you will be able to pay it back may well be detrimental to your business.
So again, it’s important to have a plan AND keep your eye on the numbers!
6. Your competition
Keep an eye on what your competitors are doing. Learn from them. Offer something different . Employ someone else to carry out some market research or do it yourself. Just look at the geographical areas where you would like to get work from for your business and make a list of all the businesses who provide similar services and prepare a spreadsheet of what they provide. Compare that with what you do and how you can change things.
Don’t ignore your competitors! I have found that if you do the research correctly then you may even get some work from them. It is important not to lose out on your market share.
Failing to prepare for changes in the market and understanding what competitors are offering could result in your own client base seizing up, which in turn might result in a severe lack of sales and profit…….leading to insolvency.
7. Defaulting on payments
The odd bill not being paid on time is ok BUT if it becomes the norm and bad management of your finances then it’s time to look at those numbers again and assess the level of Insolvency. This is where you are unable to pay your debts as and when they fall due comes in.
Negotiations with some creditors may help in the early stages, defaults on HMRC bills or other formal arrangements can be extremely damaging for your business.
Ignoring legal action threats can cause a headache and sign that your business is heading down an insolvency route.
8. Debt recovery procedure in place
Businesses that don’t have a strong debt recovery strategy in place run the risk of insolvency, as failing to recoup money owed can seriously disturb the cash flow balance.
By requesting deposits from new clients, sending invoice payment reminders, or imposing late payment fees can help you ensure you are being paid for services or goods provided.
9. Relying on one key client or customer
We’ve all heard this before . It’s the 80/20 rule. Over reliance on one or two key clients or customers can also result in insolvency if they decide to stop using your services or move to a competitor, especially if your business relies on a large percentage of its profit from them.
Insolvency may also be a risk if one of your most valued clients faces financial difficulties themselves and are therefore unable to pay you for the service they have received.
10. Burying your head in the sand
Business owners that bury their heads in the sand only further increase their chances of insolvency. Facing any financial hardship head on may open up your options and help you ‘steady the ship’ before it’s too late.
Is your business at risk of becoming insolvent?
If your business is facing some financial difficulties, it’s important not to make the situation any worse by continuing to over-budget or by applying for more credit.
Taking steps to prevent insolvency will help ensure your business has a future, but if you find you have no alternative, seek the help of an insolvency practitioner who can advise you along the way.
Next Steps
If you want to find out anything further about this topic then please feel free to call me on 0330 236 9930, 0330 236 9938 or 07961 116321. All conversations will be in strict confidence. You can also email me vee@navigatebr.com.
This article is for information and interest only. It is not a substitute for full professional advice, which will take in to account the specific and individual circumstances. Navigate Business Recovery Limited cannot accept any responsibility for any loss arising as a result of any person or organisation acting or refraining from acting on any information.
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