How to face up to potential insolvency
Accepting that a business may be insolvent is a difficult step for any business owner, but it is a step that forms an essential part of the process.
Debts, poor cash flow and financial insecurity can all drive a business towards insolvency, but they are not the only factors.
Should an owner fear that their business is heading towards insolvency, they should assess their situation and seek the appropriate advice.
As per the Insolvency Act 1986, there are several tests that can determine the state of a company, known as the cash-flow test and the balance sheet test.
Simply put, a business will fail the cash flow test if it cannot pay its debts, while it will fail the balance sheet test if the value of assets is less than its liabilities.
The key for any business facing an uncertain future is to seek corporate recovery experts for advice on their individual situation – this is key as each business is different and what works for one will not necessarily work for another.
Of course businesses can also act to protect themselves, by tackling their cash flow issues and by negotiating with creditors.
With regards to the former, aspects such as prompt invoicing can help to reduce some of the pressures on business finances, as can limiting expenses or seeking alternative finance options.
By reducing the financial vulnerabilities of a business it’s possible to have a more secure future, while communicating with creditors can help to manage expectations more effectively.
If a business is really struggling, a CVA (company voluntary arrangement) may help to reduce some of the pressure from creditors by providing more time or by writing off part of the debt.
Reducing borrowing is also vital if a business is on the verge of insolvency, as only then will it be possible to try to reduce any existing debts that have built up.
By Phil Smith