5 steps to take to avoid business insolvency

Authored by Emma Simon.
4 min read

Although not always an insurmountable problem, approaching insolvency needs to be tackled quickly and with purpose. It might only take a few small adjustments to the way you do business or deal with your own debtors that makes the difference, so let’s have a look at the signs that indicate a cash flow issue within your business.

You can’t pay your bills on time

At best, this is the awareness that a supplier payment has been made late; at worst it’s an avalanche of debt that hits you from a great height. That’s why it’s imperative to always be aware of your business cash flow situation and to know what to do should it decline further.

The top end of the scale will probably involve continual harassment from creditors on a day-to-day basis, such that it’s difficult to concentrate on or deal with anything else. This, unfortunately, brings two consequences – you can’t deal with the existing debt, but are also unable to guide the business out of trouble because you’re in permanent ‘troubleshooting’ mode.

Steps you can take

If HMRC is one such creditor, you’ll need to negotiate some breathing space quickly to avoid irreversible measures being taken against the company. HMRC has the power to issue notices of enforcement, and if they suspect that the problem is not temporary, the business can quickly be forced into liquidation by their actions.

Inefficient administrative systems

Not being able to see the ‘bigger picture’ of your business can easily lead to missed payments, and fines for failing to file statutory returns and accounts. You need to know:

  • how your business operates, including financial facts and figures
  • how much is owed to the business by your own customers
  • the likely estimates for cash flow over the forthcoming months

Reliable data allows you to identify where money may be leaching out of the business, and take positive action to bring it back into line. One of the most important areas in this respect is credit control.

Steps you can take

Efficient systems and procedures consistently used, can track how long each customer takes to pay, lets you tighten up on chasing overdue amounts and make sure that agreed credit limits are not exceeded.

Without such systems, it’s impossible to take back control and avert the often swift decline into insolvency.

Insufficient sources of credit

Are you using a wide range of suppliers just to obtain the credit you need for day-to-day operations? This is a sure sign of impending trouble, but one that can potentially be averted with the input and guidance of a professional.

Steps you can take

Your accountant or a licensed insolvency practitioner will scrutinise business cash flow needs and may be able to identify a good solution that will steer you away from insolvency. The answer could be something as simple as selling some of your underused assets, or factoring out debtor invoices if they are generally paid on time, to obtain a quick injection of cash.

Lack of control over debtor payments

Consistent late payment of your debtor invoices is often one of the main reasons why businesses struggle financially, but the problem can be addressed by introducing stricter controls.

Steps you can take

Having access to an Aged Debtors’ Report will highlight the worst offenders, and identify any emerging patterns with customers who had previously paid promptly. You’ll have an overall figure for how much is owed to the company, and a breakdown of each debtor’s account.

If most of your debtors exceed their agreed terms for payment, and you are suffering creditor threats or action against you, this is a certain indicator that something needs to be done.

Problems with stock

One of the most obvious warning signs, but also one of the most difficult issues to face, is when you aren’t able to purchase the stock you need to fulfil orders because you’re late paying your suppliers.

A reluctance to extend or offer you new credit can leave you with nowhere to go if the bank has also refused to increase your overdraft, and there are few assets to leverage.

Alternatively, holding too much stock can be a drain on working capital if it’s not sold quickly enough, and may result in losses if you have to discount the price. Taken on its own, and if it only happens occasionally, this might not prove to be your downfall, but when added to potential problems in other business areas, it can turn into the final straw for your business.

Steps you can take

Avoiding a full decline into insolvency may be possible, but generally requires awareness and acknowledgement that a problem does exist. Burying your head in the sand is not an option – you need to pinpoint the areas of concern and take fast action to redress the situation.

Keith Tully is a business recovery expert with over 20 years’ experience advising company directors facing cash flow problems. He is a partner at Real Business Rescue (external link), part of the Begbies Traynor Group.

At Hiscox, we want to help your small business thrive. Our blog has many articles you may find relevant and useful as your business grows. But these articles aren’t professional advice. So, to find out more on a subject we cover here, please seek professional assistance.

Emma Simon

Emma Simon is an award-winning consumer journalist with over 20 years’ experience of writing about money, property, travel and business. She is a former personal finance editor of the Sunday Telegraph, deputy money editor of the Daily Telegraph and personal finance correspondent at the Press Association. She writes for a number of national newspapers, including the Sunday Times, the Guardian and the Mail on Sunday.