Companies frequently fall into financial trouble – it’s not a nice experience but having a plan for dealing with it is essential.
Whether a business is facing insolvency or struggling to turn around falling revenues, a failing company can be a hugely stressful experience.
It’s important that company directors address any potential financial troubles quickly and take action. It could mean the difference between a business being saved or going under.
Here are a few steps to consider if you find yourself in such a situation.
1. Look at the bigger picture
Burying your head in the sand of day to day operations or simply working harder won’t solve the problem – but it’s often the go-to solution for many hard-working business owners.
Instead try to look at the bigger picture. What strategies can you implement that are going to help? What do you need to stop doing? What parts of your business are causing you to lose money?
2. Make adjustments to the way your company operates
To avoid any potential future issues with cash flow, company directors should assess the viability of plans and contracts. It might be better to outsource this process if the staff within the company aren’t fully qualified financial practitioners.
If you do receive professional guidance, it may also be worth attempting to informally renegotiate some of the company’s existing debts – after all, it’s in the creditor’s interests to get their money back.
If and when unforeseen costs arise that could threaten to take your company to the point of no return, it’s crucial to have a big a buffer as possible to ease the stress.
3. Slim down your operation
Concentrating on the essentials often means you return to the most profitable parts of your operation. This might mean redundancy, it might mean selling off assets and it will definitely mean analysing exactly what you need to run your business.
4. Deal with your tax bill
Don’t be tempted to use funds you’ve allocated for tax payments to cover other expenses. This short-term decision could affect the viability of your company in the future.
When the time comes, your PAYE, VAT or corporation tax bill will be marked as due by Her Majesty’s Revenue and Customs (HMRC).
One strategy that can help your business – if it is struggling – is a Time To Pay (TTP) arrangement, which allows you to pay off any outstanding taxes over a fixed period of time. To gain approval for a TTP, you’ll need a robust business proposal and evidence that your company is still viable and able to pay off its debts during that period.
Depending on effective management, your company may also be able to access emergency funds to help settle those payments on time.
5. Think about a Company Voluntary Arrangement (CVA)
If the debts of your company are spiraling out of control, a Company Voluntary Arrangement (CVA) can help you consolidate any debts and, therefore, save your business.
A CVA is a legally-binding contract between an insolvent company (i.e. one that is unable to pay off debts) and its creditors, to pay off their debt, in part, and over a fixed term. When this happens, each party must abide and 75% of creditors are required to agree to terms.
A CVA can help save an insolvent business from being forced to close its doors entirely and is often supported by creditors as they know they will have a better chance of getting back funds than if the company goes into liquidation.
6. Consider going into administration
If you’ve been served with a ‘winding up’ petition, administration is considered a good solution to better manage the process. It may sound like an unfavourable option but going into administration could ultimately rescue your company when this occurs.
When you enter administration, it essentially means you transfer management of your company to an administrator – or a licenced Insolvency Practitioner (IP) – who will manage the business and work in the interest of its creditors.
The by-product of handing over management of your company during this period is that it legally protects it from being shut down or prosecuted. With a qualified IP in place to steer the company towards the best possible resolution, administration buys you time.
If you fail to seek professional guidance, the process of administration can be long-lasting, expensive and may ultimately lead to liquidation or the selling off of your company’s assets.
7. Consider pre-packaged administration
Pre-packaged administration is where a company seeks the buyer (i.e. an existing director) for the viable parts of the business and assets before an IP is appointed to facilitate the sale.
It offers a quicker, cheaper and more continuous option for companies who feel they have a viable component they need to extract from an otherwise insolvent business.
In the event this worst-case scenario does happen, the most effective way to rescue a business from insolvency is to ensure that the current financial decisions made are professionally audited in the first place by an independent financial advisor.
If you believe your business is in financial trouble and want some advice on your next steps, contact the Future Strategy team today.