How can I reduce the risks of insolvency for my limited company?

There are a number of ways you can mitigate the risks of insolvency as a director. Being aware of the company’s financial position is a fundamental part of your role, and on a practical basis helps you deal quickly with looming issues around company cash flow, for example, or problems in your market that could damage the business.

But what else can you do to reduce the ever-present risk of the company slipping into insolvency?

Improve your cash flow

Improving cash flow will immediately boost the company’s chances of survival, and on a day-to-day basis, is more important than making a profit. There are so many ways that cash flow can be compromised, but most of them are easily rectified if you remain vigilant and are prepared to take action quickly.

Here are a few areas that would be beneficial to focus on:

• Invoicing
  Some businesses only invoice at the end of the month. Customers should be invoiced regularly throughout each month so that cash comes into the business on a steady basis.
• Collecting money in
  The length of time taken to collect in debts can be a key indicator of a company’s risk of insolvency. Late payments have a knock-on effect to every area of your business, so it’s crucial to set up effective systems for chasing payment, and include details of your credit policy on every reminder and statement. 
• Stock levels
  If you’re holding too much stock, it becomes a constant drain on cash flow and needlessly ties-up working capital. Additionally, you may have to sell the older inventory at a reduced price, causing a further drop in expected cash.
• Overtrading
  Overtrading is a common problem that can quickly lead to insolvency. Extreme pressure is placed on a business that takes on a large order, but does not have sufficient resources to fulfil it.
• Cash flow forecasts
  One of the main tools in keeping control of cash is the cash flow forecast. It is an estimation of your company’s cash needs over several months, and is based on regular payments in and out. Consequently, it highlights when there will be a shortfall in available cash.

Check business expenses

Uncontrolled non-essential costs can damage a company’s chances of success. It is a good idea to go through all your business costs to identify where cuts can be made, and boost the overall availability of working capital.

Even by cutting the majority of costs by only a small percentage, the overall savings can be significant. It is also worth trying to negotiate better deals with your existing utility and telecoms companies, or moving to a different provider.

Rather than purchasing business assets, leasing can offer a good alternative and removes the financial risk of making large cash payments.

Understand your alternative finance options

Although the bank may be willing to lend, it could be beneficial to use an alternative lender to finance the business. A range of options now exist to fund a business in financial difficulties, including invoice factoring and discounting, and asset-based finance where the value in a business asset is leveraged to provide working capital.

The most suitable option will depend on your individual business model, the market in which you operate, and the level of risk lenders will be exposed to. Begbies Traynor has contacts with a wide range of UK lenders, and can advise on the best option.

Communicate well with creditors

Your creditors will appreciate open communication if a payment is going to be missed, and will trust your commitment to repaying them if you respond quickly to their letters and phone calls.

Developing good relationships with your creditors can encourage them to negotiate with you, and to delay legal action if they know you are being proactive in trying to stabilise the company’s position.

It is worth bearing in mind that a creditor owed more than £750 can petition the courts for your company’s winding-up. This figure has increased to £10,000 as per the Government's temporary measures which will apply for the period 1 October 2021 to 31 March 2022. HMRC are known to take this type of action quickly, so if you are in arrears of tax or National Insurance, it is vital that you make contact.

Seek professional advice

You should obtain advice from an accountant, solicitor, or licensed insolvency practitioner as soon as you are aware that the company is struggling. Professional advisors have valuable contacts in various industries, and as well as helping the company, their guidance will clarify how serious your position as director could be in terms of personal liability.

Begbies Traynor is the leading business rescue and recovery practice in the UK, and has a network of offices around the country. Call us in confidence to arrange a free initial meeting.