How to avoid insolvency
A business becomes insolvent when it is unable to pay its debts on time, or if it doesn’t have sufficient assets to cover its debts. But business insolvency doesn’t happen overnight. Keeping a close eye on your business’ performance and cashflow gives you an early warning of any impending problems, and time to take action to avoid insolvency.
Some of the actions you might take to avoid insolvency:
Improve your cashflow
Even if your business is trading profitably and you have enough capital, you are in danger of becoming insolvent if you are unable to make payments as and when they are due. If you do not have a good cashflow, you could improve the situation by:
- Invoicing your customers on time and regularly
Negotiate regular payments from customers with long-term contracts. - Chasing debts
Don’t let late payments go unchallenged. - Avoiding overtrading
Don’t try to fulfil more orders than you have the resources and cash to cope with. - Reducing any unnecessary stock.
- Renegotiating with suppliers
See if your main suppliers will agree to adjust your credit limits and payment dates. - Looking at arrangements such as factoring and invoice discounting
These pay you a percentage of any outstanding invoice in advance. - Selling assets
You can sell under-used assets and lease them instead.
Negotiate with your creditors to avoid insolvency
Never ignore your creditors – if you owe them more than £750 they can petition a court to order your company into liquidation. If you are worried about the risk of business insolvency, talk to your creditors before you become insolvent, and try to renegotiate a payment plan that you can realistically meet. Creditors who stand to lose their money if your business folded are likely to be more willing to negotiate.
Reduce your overheads
If your business is having financial problems, it’s essential to review your overheads to see where you can make a saving – but don’t make such big cuts that you then have trouble operating. Possible cuts include:
- Advertising costs and R&D costs – can be reduced very quickly.
- Staff costs – reducing overtime or staff hours (but be aware that making redundancies will cost more in the short term and have serious consequences on morale, so should be considered carefully).
- Investment costs – a short term measure; in the long term you are likely to need to invest in the growth of your business. However, leasing rather than buying new equipment is an option.
- Premises costs – consider relocating to smaller premises or sub-letting part of your premises.
Get professional advice
When directors take timely advice on saving a failing business, bankruptcy becomes a less likely option and the chances of a successful business turnaround are improved. Don’t wait until the problems get out of control and insolvency is inevitable. Seek professional advice immediately if:
- You cannot cover your debts
- You cannot pay your staff
- You have a serious lack of working capital
- You receive a County Court summons
Even better, act before any of these eventualities occur. It costs absolutely nothing to speak to an expert financial adviser at Touch Financial. We offer a free consultancy service for clients who are in or heading for financial difficulties – we’ll work with you to understand your situation and put you in touch with the most appropriate lender, insolvency practitioner, or small business administration service for your specific needs.
Whether you’re interested in a financial health check as a precaution, or need urgent advice about business turnaround, taking a positive step to avoid business insolvency couldn’t be easier – call one of our consultants now.
Also in this section
- The role of a business administrator
- Warning signs your business could be in trouble
- What to do if your business is in financial trouble
- What are your options?
- How to avoid insolvency
- Protect yourself in the event of insolvency
- Do’s and don’ts for directors
- Seven steps for turning your business around
- Is your business insolvent?
- A quick guide to insolvency
