COVID-19 update: we are working as close to normal as we can, continuing to support clients with business valuations and transfers. Contact us if you're considering your business options in this difficult time.




What is insolvency and what does it mean for your business?


There’s plenty of terms that are thrown around when a business faces financial trouble, from liquidation and insolvency to bankruptcy and administration and they all mean something slightly different.

During the first quarter of 2019 company insolvencies increased as did voluntary liquidations and company voluntary arrangements (CVAs). Administrations increased to the highest level for five years.

If your company needs to declare insolvency then simply put, you don’t have the funds within the business to cover debts when they’re due. However, as a director you have certain duties to ensure that your creditors don’t lose out if you experience cash flow issues.

Insolvency is often historic, with the issues that ultimately cause a company to enter insolvency potentially occurring years previously and therefore not always easily picked up upon. But, it can also be fast.

Insolvency could happen overnight. We only have to look at British Steel or Jamie Oliver’s restaurant chains to see how quickly the market changes. How much would losing one key customer impact your business?

Avoiding Insolvency

If your company is struggling financially it won’t survive for long unless action is taken. How can you feed the future of your business and improve its cashflow? There’s several ways to review your current balance sheet, take a step back and see if any of the below could be improved within your company.

Cashflow – Do you collect unpaid debts? Stop taking a soft approach to payment collection. If you’ve got clients or customers struggling to pay, could you resolve this by agreeing a payment plan? As well as reviewing how you collect payments, ensure you invoice promptly to reduce further payment delays.

Delays – On the flip side, if you’re unable to make payments of your own, which is likely the case if you’re waiting on payments yourself, then can you delay any payments due? Rather than paying on receipt, is there any leniency in when you could make payments?

Planning – It seems an obvious one, but many businesses fail to forecast realistically. With this kind of planning, you’ll know how your business moves, when you can expect influxes and lulls and this allows you to plan accordingly.   

What are the options available to you when facing insolvency?

It might be too late to address the above, in which case telling you how to monitor your finances may be redundant. The best thing to do if your business is in trouble is to seek professional advice. Particularly as there are responsibilities that a company director must uphold if a company becomes insolvent.

The first decision would be to address whether the company can keep trading or not. If you decide to continue to trade, the company must be able to avoid liquidation. Liquidation is defined as the legal ending of a limited company, preventing further business or employment of staff.

If you continue to trade whilst insolvent, all creditors must be contacted in order to reach an informal agreement to pay what is due, this is referred to as company voluntary arrangement.

The other option is to go into administration. This protects a company from legal action that creditors could take to recover their debts. It buys time to sell assets and raise funds to clear outstanding debts. This removes the director or owner from their legal ownership of the company, allowing an administrator to plan how to restore a company, sell assets to pay debts or sell the business.

If you need further advice on selling your business during administration or are looking to grow your business and add value, contact us today and we can discuss in strictest confidence.

 You can also keep up to date with the latest from us on our LinkedIn page. We share useful insights into Buying, Selling, Building and adding value to your company.