How can I reduce the threat of insolvency for my business?

Updated: 27th January 2021

It only takes a downturn in the market or the loss of a key customer to dramatically change the fortunes of previously successful companies. In fact, the threat of insolvency hangs over every business regardless of past performance.

But are there any actions you can take to reduce this threat? Here we look at how an effective overall approach to running the business can help, and identify a few practical steps to mitigate the risks of insolvency.

Foster good relationships with your creditors

By maintaining positive relationships with the bank, your suppliers and other creditors, they are more likely to understand your predicament should the company begin to experience financial difficulties.

It is this connection that can make a difference when you need extra funding, or a little more time to pay supplier bills. Their support is crucial when trying to trade your way out of financial difficulty, as they may be less inclined to start legal action.

What to do in practice

  • Contact creditors as soon as you know that payment will be late
  • Answer any letters and phone calls promptly
  • Pay as much as you can
  • Negotiate a repayment plan for the remainder

Maintain close control over cash flow

Maintaining positive cash flow is vital. It doesn’t matter how much profit your company makes, if there is no cash the business will fold. Additionally, as a director you’re obliged to know and understand your company’s financial position – you should be aware of how much working capital is needed at any given time, and ensure there is enough money to pay the bills.

What to do in practice

  • Invoice immediately after completing the work/fulfilling an order
  • Develop an effective payment collection method to bring money in quickly
  • Use cash flow forecasting to predict your company’s cash needs over several months
  • Be aware of the dangers of overtrading

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Keep abreast of developments in your market

This includes knowing when there is a new threat to your market share, or when the market in general is shrinking. It could be that your competitors have invested in new technology, and sales of your own products are suffering as a result.

It’s also a good idea to keep in close contact with your own suppliers - if one or more go out of business, it could have critical implications for your own operations.

What to do in practice

  • Regularly research your market online to gain an overall view of what is happening
  • Network locally to find out how your competitors are faring
  • Read the financial press, or follow online

Reduce overheads

Reducing company overheads will release valuable extra working capital to pay the bills, and fulfil orders. Even a small reduction over a range of cost centres can make a significant difference.

What to do in practice

  • Cut some of the costs of employment by limiting overtime hours
  • Identify and reduce any non-essential costs 
  • If overheads are already low, aim for a very small reduction over a wide range

Additional finance

With so many alternative sources of finance available, your bank may not be the best lender for your business. Asset-rich companies can leverage the value within plant, machinery, and vehicles, to inject cash into the business quickly. Alternatively, invoice finance offers a long-term solution when cash flow is erratic.

What to do in practice

  • Seek professional guidance as to the best type of financing for your company, so you are prepared should you need it in the future
  • Talk to the bank about the possibility of increasing your overdraft facility – agreeing an arrangement in principle will speed up the process if you need to call on it urgently

Begbies Traynor will help you identify where money can be saved, and advise on effective credit control procedures to boost cash flow. We are the UK’s market leader in business rescue and recovery, and have contacts with more than 50 lenders. Call one of the team for a same-day appointment.

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