Our economy relies heavily on the success of small-medium sized businesses, yet unfortunately, they can be very susceptible to insolvency.
A recent report by The Insolvency Service noted that one in every 202 active companies entered insolvent liquidation in 2022. This equates to a staggering 22,109 companies, which is the highest number since 2009 and worryingly 57% higher than the numbers recorded in 20211. Research also reports that more than 1 in 10 UK businesses stated that they had a moderate-severe concern for the risk of insolvency of their business2.
Businesses fought to survive through the pandemic, and many were able to make use of the Government funding that was put in place to help them. However, businesses are still fighting to stay afloat due to economic uncertainty, a slower economy, and higher costs.
This is a worrying time for business owners, but there are steps you can take to protect your business. Below, we’ll explore some of the causes of insolvency and what you can do to avoid it.
What is insolvency and how does it affect your business?
A company is insolvent when it can’t pay its debts. This could mean either it can’t pay bills when they become due, or it has more liabilities than assets on its balance sheet.
A company that is insolvent is in danger of being closed down, and the effects of insolvency can be far-reaching and felt beyond the company itself and the Directors, For example, creditors who are owed money or employees that may lose their jobs.
However, company directors may be able to take action that allows the company to continue trading. Understanding what measures can be taken during times of financial hardship is essential such as proactive and strategic planning, always knowing what financial situation your business is in, and having a healthy and steady cash flow.
What are the causes of insolvency?
There are many factors that can lead to a business becoming insolvent. These include:
- Poor financial management or lack of financial planning – Not having an adequate plan in place for the future of the business, or not monitoring its progress regularly, can result in unmanageable debt and inadequate cash flow.
- Unexpected costs – Unforeseen events such as natural disasters, legal issues and changes in market trends can cause financial stress and result in insolvency.
- Lack of liquidity – If a business does not have enough cash to pay its debts, it is likely to become insolvent.
- Over-leveraging – Taking on too much debt in order to finance growth can lead to a business becoming overwhelmed with payments and unable to meet its financial obligations.
Know the warning signs that your business is at risk of insolvency.
Keeping an eye out for the warning signs of insolvency is crucial. A business can suffer years of losses and not be insolvent but can run out of cash almost overnight and while most business cycles have their ups and downs; prolonged downturns may be indicative of more serious financial issues.
Some tell-tale signs that your business may be at risk of insolvency include an inability to pay bills on time, rapidly dwindling cash reserves, consistently late payments from customers, and increasing levels of debt. If you notice any of these problems in your business, take it as a warning to take action quickly and consult with a financial professional who can help you properly address the situation.
How can you protect your business from insolvency?
Protecting your business from insolvency is an important and complex task for businesses of all sizes. One key strategy to prevent insolvency is proactive financial planning, including creating a budget that encompasses the entire operation of the business. Additionally, monitoring cash flow and carefully tracking income vs. expenses can help stave off financial struggles.
It is also essential to have competent advisors on hand who can evaluate opportunities, provide advice on financial matters, and identify any potential risks that may arise. Leaning on professionals who have experience navigating such difficult situations could provide the clarity you need in order to move forward.
Finally, businesses should consider having emergency funds available in case of financial hardship as well as take advantage of any government loan programs or incentives that are available. Invoice finance may also be appropriate for a business and provides much-needed liquidity by generating cash from outstanding invoices, enabling creditors to be paid on time. Taking these measures will help protect your business from insolvency and secure its long-term success.
Be proactive in managing your business finances to avoid insolvency in the future.
In business, proactivity is key to long-term success. By taking charge and managing your finances, you can avoid financial distress in the future. An important step towards avoiding insolvency is to accurately record all your income and expenditure. This will give you an understanding of where your money comes from and how much it costs to run day-to-day operations, allowing you to plan for and manage uncertainty around revenue-raising or cost-saving possibilities.
You can also take into consideration the following actions:
- Sell off any surplus assets.
- Ensure rigorous and consistent chasing of outstanding invoices.
- Try to work with only trustworthy suppliers and clients.
- Look at ways of reducing operational costs and overheads.
- Restrict unnecessary spending by implementing a sign-off process.
- Be open with your suppliers if you are having cash flow issues.
- Seek advice from a qualified accountant, lawyer, or insolvency practitioner.
Being proactive with respect to managing business finances is an invaluable tool when it comes to keeping your business sustainable and viable over the long term – if done well, it can be the difference between having a prosperous enterprise and ending up insolvent!
Financial support in the form of invoice finance.
Invoice finance can offer a lifeline for businesses facing financial difficulties. If your accounts are in disarray and you’re worried about suddenly running out of working capital, don’t wait until it’s too late – seek out professional advice from experienced invoice finance providers such as Partnership Invoice Finance today.
We will guide you through the process, helping you to decide if entering into an invoice finance agreement is the right choice for your situation. Ultimately, only you can decide what is best for your business; however, having access to help and advice can prove invaluable during times of financial strife. Contact us for more information.
1 – The Insolvency Service Company Insolvency Statistics Releases (Jan 2023)
2 – The Office for National Statistics (ONS) Business Insights and Conditions Survey (BICS) Aug 2022