What to do When Your Business is in Financial Trouble

The prospect of business insolvency is a stressful experience; not least for small business owners, whose company has been with them since day one.

In this scenario, while it can be tempting to close one eye and hope the creditors will eventually go away, company directors seeking to save their business recognise that the only way forward is with rapid action.

With this in mind below are five things you can do if your business is in financial trouble:

1. Look at operational adjustments

Just as a doctor will tell their patient that the best way to avoid sickness is to take action while they are healthy- your business is the same.

To avoid future issues with cash-flow, directors should rigorously assess the viability of business plans and contracts, which may be better outsourced if the staff within the company are not fully qualified financial practitioners.

Also, providing that you do receive professional guidance, it may also be worth attempting to informally renegotiate some of the company’s existing debts – it is in the creditor’s interest to get their money back.

Ultimately, the balance sheets are what matter; the better the profit margins, the bigger the buffer for when unforeseen costs come along which would otherwise threaten to take your business to the point of no return.

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2. Deal with the tax bill

While it can be tempting to use funds allocated for tax payments to cover other expenses, this is always a mistake and is what we would consider a ‘case example’ of making short-term decisions at the expense of future company viability.

Ultimately, when the PAYE, VAT or corporation tax bill is due, this will be marked as due by HMRC. One strategy we would suggest is a ‘time-to-pay’ arrangement can help struggling businesses by allowing them to pay off outstanding taxes over a fixed period such as 12 months.

Approval for a TTP requires a robust business proposal and evidence that the company is still viable and able to pay off their debts in this time.

With effective management, the business may also be able to access emergency funds to help settle these on time, with more sensitive debts addressed via a small business loan under professional guidance.

Find out more about dealing with HMRC tax arrears

3. Consider a Company Voluntary Arrangement

In the event that the debts of a company have spiralled out of control, a Company Voluntary Arrangement can allow it to consolidate the debt and ultimately save the business.

A CVA is a legally binding contract between an insolvent business (one that cannot realistically pay off its debts) and its creditors, to pay off their debt, in part, and over a fixed term. In this scenario, each party is contractually bound to abide, and 75% of the creditors are required to agree to such terms.

At Forbes Burton, this is one approach we take with our clients, and effectively enables the business to negotiate a payment plan to settle the debt.

A CVA can save an insolvent company from being forced to close its doors entirely- and creditors are often supportive, as they know their chances of recouping their funds are better with a CVA than with full liquidation.

4. Call in the cavalry

While no director wants to be served with the dreaded ‘winding up petition’ (which, in enterprise terms, means: ‘it is time to shut down’), administration may be a good solution to at least better manage the process.

This may sound like an unfavourable solution, but administration may ultimately rescue the business when this occurs.

Entering administration essentially involves transferring management to an Administrator (a licenced Insolvency Practitioner) who is legally obliged to manage the business in the interest of its creditors.

However, the by-product of surrendering management during this period is that this also legally protects the company from being shut down or prosecuted.

In essence, administration buys time, and ensures that a qualified practitioner is in place to steer the company towards the best possible resolution. However, without professional guidance, this process can be expensive, long-lasting, and may ultimately lead to liquidation or the selling off of company assets.

5. Call in the cavalry early, and keep the wheels turning

However, following recent changes in UK legislation, there is now the alternative of pre-packaged administration.

Pre-packaged administration is where a company seeks the buyer (potentially an existing director) for the viable parts of the business and assets before an administrator is taken on board to facilitate the sale.

Because of this, pre-pack is the faster, cheaper and more continuous option for businesses who feel they have a viable component they need to extract from an otherwise insolvent company.

Ultimately, while it is important to ensure that administration in either scenario is evaluated and guided by an independent financial advisor in the event that this worst-case scenario does occur, the best way to rescue a company from insolvency is to ensure that the current financial decisions made within a company are professionally audited in the first place.

Next steps

If your business is in financial trouble and you need help we are only a phone call or email away on 01472 254914 or [email protected]

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