Risk Insights – Dealing With Insolvency
Insolvency refers to a situation in which a firm is unable to pay its debts; it is unable to pay its bills when they become due; or its balance sheet contains more liabilities than assets. Insolvent businesses risk going out of business.
Unfortunately, corporate insolvencies in England and Wales increased dramatically in the second quarter of 2022. According to government data, 5,629 firm insolvencies occurred between April and June, a 13% increase from the previous quarter and an 81% increase over the same time in 2021. Furthermore, voluntary liquidations have reached an all-time high since the 1960s.
The current difficult economic situation is one element contributing to this insolvency tendency. During the COVID-19 pandemic, businesses experienced extraordinary obstacles and were unable to trade for extended periods of time. Despite this, many businesses were able to withstand the storm thanks to a variety of government assistance programmes. Such assistance is already waning, but firms continue to face obstacles, including record-high inflation, rising energy costs, and supply chain issues. As a result, the number of company bankruptcies may continue to climb.
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This article explores how to avoid insolvency and what to do if your company finds itself in this situation.
Tips for Preventing Insolvency
If your company is undergoing a big slump, it is critical not to give up hope. Even profitable companies have cash flow issues from time to time. It may be feasible to prevent insolvency entirely by taking rapid and immediate action. Consider the following suggestions to get your business back on track…
Analyse and improve cash flow
While stocks and assets are wonderful to have on hand, their value may be declining. As a result, consider selling any obsolete or underutilised stocks and assets to inject some money into your company. Consider invoice finance or asset-based lending if necessary; some businesses will pay you a percentage of your outstanding bills to enhance interim cash flow.
In today’s difficult economic climate, corporate insolvencies have increased. In reality, there were 5,629 corporate insolvencies between April and June 2022, an 81% rise over the same time in 2021.
Unclog incoming payments
Check your payment conditions with your clients. To ensure a free flow of cash into the firm, ensuring that clients are charged on a regular, accurate, and timely basis. Furthermore, if you owe any payments or debts to customers or suppliers, take immediate action to retrieve them.
Reduce your overheads
Examine cost-cutting ways to reduce spending. Consider relocating to a more cheap location, assessing employee requirements, and temporarily reducing any “soft” business expenditures (eg advertising).
Negotiate with creditors
Negotiate sustainable payment conditions for any debts due with suppliers and other creditors, if possible. In addition, if you are having difficulty paying your tax payments, contact HM Revenue and Customs about its “Time to Pay” option.
How to Navigate Insolvency
Despite their greatest efforts, some firms may fail to survive. If you are one of them, you have numerous options that may allow you to continue trading. Among these alternatives are the following…
An informal agreement with creditors
If no formal action is imminently threatened by any of your creditors, you may be able to reach an informal agreement to pay off debts on different terms. Be aware that an informal arrangement is not legally enforceable and can be revoked at any time by creditors.
A company voluntary arrangement (CVA)
A CVA is a legally binding agreement between a limited company and its creditors to pay off all or some of the firm’s debts over a set period of time. Creditors may freeze interest rates and allow you additional time to repay cash owed under a CVA.
Administration
You hand over your firm to an insolvency practitioner, often known as an administrator, who will strive to keep it from being liquidated. If they can’t, they’ll try to pay off as much of your debt as they can by selling the company’s assets. Although your business can continue to operate, directors will be denied control. However, administration does provide protection; creditors cannot sue you without first asking permission from the courts.
Conclusion
It’s no surprise that many businesses are struggling financially in today’s harsh economic climate. If you are one of them, it is never too late to act to right the ship. Along with cost-cutting strategies, consider hiring an insolvency expert to uncover and evaluate your options. The sooner you act, the more likely it is that you will be able to correct the course of your business.
For further business mitigation strategies, contact Plan Insurance Brokers today.
