We knew it was coming. It was no secret how hard the COVID-19 pandemic hit tens of thousands of businesses across the UK.
But propped up by the furlough scheme, bounce-back loans and other forms of financial support, the UK at least avoided a devastating wave of company failures when the pandemic was at its height.
Yet support was only ever going to be available for a limited period of time. By the start of 2022, businesses were pretty much left to fend for themselves again. Lo and behold, company insolvencies in Q1 of this year leapt a massive 168% from the previous quarter, and more than doubled year-on-year.
Most worrying of all, 87% of the 4,896 insolvencies filed in the first quarter resulted in creditors’ voluntary liquidations (CVLs). Without the life support of government schemes, and with creditors once again able to pursue debts after an 18 month moratorium, thousands of businesses simply had no choice but to wave the white flag.
Other factors have contributed to the highest insolvency rate in a decade. Rising interest rates have hurt heavily indebted companies, while we’re all very aware of the inflationary pressures triggered by various causes, including the impact of the war in Ukraine on fuel and energy prices.
So much for the bad news. Things are tough out there for sure. People’s livelihoods are on the line, and high insolvency rates tend to have a snowball effect on the rest of the economy. The higher the number of businesses that fail, the more damage is done to the economy, which only serves to drag more businesses.
So what can you do to avoid being one of the unlucky ones?
Cash flow is key
In many ways, staying solvent is all about cash flow. As long as you have enough money in the bank to pay your bills (including your debt repayments), you keep your head above water. Of course, that means having enough revenue coming into the business and not seeing your accounts emptied by sudden spikes in cost. But many businesses initially get into trouble because they have cash tied up that they cannot access when needed.
Be on the ball both about billing clients and customers promptly and chasing up all overdue invoices and debts. Don’t be afraid to exercise your right to enforce penalties on late payers, and terminate contracts with repeat offenders. If necessary, renegotiate contracts with shorter payment terms. Ditch clients that dig their heels in. Your businesses’ solvency is paramount and anyone who refuses to pay you within a time scale that you require will only drag you down.
Renegotiate payment terms with suppliers and creditors
If you are finding it difficult paying your bills on time, then as well as looking at the flow of cash into your business, you should also have a look at whether you need to restructure how money is going out.
This will need to be done through negotiations with your suppliers and creditors. You have to be sensitive to the fact that they have their own cash flow needs. But ultimately, it’s better for them to give a bit of leeway and continue getting your custom than it is for you to slip deeper into trouble and end up unable to pay what you owe.
If you are already insolvent (i.e. you are unable to pay your bills), you can contact a licensed insolvency practitioner and inquire about setting up a company voluntary arrangement (CVA) to formally restructure your debts.
Reduce your costs
Another step that many businesses (and individuals) are having to face up to at the moment is reducing their outgoings. This is one of the effects of rising prices for things like raw materials, energy and transport. If one cost in your business goes up, unless you can increase your revenue accordingly, you have to cut costs in other areas to protect your cash flow.
If you have any concerns about the financial health of your business, it is important to seek help as soon as possible. As licensed insolvency practitioners, at JT Maxwell we specialise in helping company directors and business owners avoid insolvency as well as finding the best possible solutions if you do slip into it.
Contact our team today for an informal chat about your situation.