9 practical steps to help avoid insolvency

One in five medium-sized businesses are not confident they can survive a forthcoming recession – with almost half recognising there is a likelihood they could face insolvency in the coming months. This is according to a recent survey by Evelyn Partners’ of more than 500 UK medium-sized businesses. If you are concerned about your company’s chances of failure in the current climate, these 9 practical steps can help you weather the economic storm.

1. MI is crucial – make sure yours is accurate

Accurate and timely data underpins business success and forms the basis of realistic projections that can help you manage your business through tough times.

The most useful tools are budgets and cashflow forecasts. A good model allows you to project into the future based on current assumptions and then tweak as real time situations change.

Budgets are created by taking the previous period’s income and expenditure, then adjusting for your knowledge of current and projected trading conditions. These give clarity to your expected revenue and costs for the period ahead.

Comparing the budget against actual figures going forward and where appropriate adjusting the budget/forecast for future trading conditions provides a critical picture of what your business’s cash needs are likely to be.

2. Can you conserve or generate cash?

“Cash is king” might sound like a cliché but it’s as true now as during previous recessions.

If, for example, your cashflow shows you will need to extend your overdraft facility in three months’ time, you need to talk to your bank as soon as possible. Any bank is more likely to look favourably on your request if you get in touch well in advance rather than approaching them just days before you need the money.  

There are many ways to help generate cash from your balance sheet and trading depending on your business. We are happy to review and provide a list of options.

3. Review your business forecasts regularly

Updating and reviewing budgets and cashflow forecasts regularly can give a clear picture of what’s happening in your business and what to be ready for.

Comparing forecasts with actual performance can highlight potential problems. For instance, are sales holding up in the way you expected when drawing up the budget? Or, if you run a seasonal business, how much do you expect sales to fall in the next quarter – and what impact will that have on cashflow?

4. Diagnose problems with your business

Review your management information regularly to analyse if things are not going right.  

Perhaps turnover has gone up but cash balances are not keeping pace. Then look at debtors to see if any of them are slipping behind with payments. Big customers can have a disproportionate impact on cash inflows, so it’s good practice to start reviewing them first. Your biggest customer, if not paying on time, may not be your best! Especially if they have squeezed your margin.

Also review your payments to suppliers. If they give you 30 days credit but you are paying them faster than that, you could be missing out on valuable cash balances.  

5. Spotlight sales

Reviewing budgets against actual performance can highlight problems with particular product or service lines. If sales are flagging in any sector or margin reducing, then it’s time to ask why, and what can be done to improve matters.

A common problem is companies not pricing work properly. When quoting a price for a new client – especially when times are tough – the temptation is to set a small mark-up in order to win the work.

But this can set unrealistic expectations for future quotes. And it is a particular problem in sectors that are experiencing high inflation in their input costs.

6. Can you realise the value on any assets?

Companies often have money tied up in assets that could be put to better use and bring more value to the business.

If you are holding more stock than you need in the current environment, then selling the excess can help release working capital.

The same idea applies to fixed assets. If plant or equipment is sitting in a yard or office and not being used, consider renting it out to create a new revenue stream, or selling it.

7. Look for opportunities to generate savings

If your information review has identified unprofitable parts of the business, you need to think about how to turn them around. If that’s not possible, consider whether they could be sold or closed down.

It may be that administrative savings can be made, such as reducing premises if staff spend part of the week working from home. 

But beware false economies. Make sure there are enough experienced staff to keep everything running so that the business can be scaled up again when times improve.

8. Examine all your options

There’s rarely a single silver bullet that will bring a company at risk back into solvency.

More often turning things around comes from taking a review of the entire business. This can involve identifying efficiencies and improvements from all areas: from sales and procurement to marketing and customer relationship management, and everything else in between.

9. Concerned about insolvency? Get advice early

Businesses have had to weather a number of perfect storms in recent years. Many directors are worn out and are so worried about making the wrong decision that they seem unable to take any decision.

That’s when you need to talk to someone as soon as you realise there might be a problem. Having a person to bounce ideas off can be invaluable. That fresh pair of eyes can see things you haven’t, and give you a fresh perspective on what could work best for your business and its circumstances.

Talk to Evelyn Partners

If you want to know more about the steps your business can take to keep trading and avoid insolvency, our experts can help.