How Should Businesses Respond To The Prospect Of Insolvency? 4 Tips To Be Aware Of
/No business is guaranteed longevity. While more-or-less every enterprise begins with the ambition to grow and continue, a considerable number do not manage to go the distance even at the best of times. According to the ONS, business death rates in the UK sit at an average of around 10% - but it is worth understanding that the longer the passage of time, the more likely a business is to fold.
Of course, the UK’s current economic landscape indicates additional pressures on currently operating businesses. The rate of inflation has been unusually high for nearly a year, having jumped to 11.1% in recent weeks. The Bank of England has responded by increasing interest rates, in the hopes of putting downward pressure on spending and lending – something which has hastened the arrival of a national recession.
Recessions are difficult times for all businesses, as spending sinks and businesses lose profits. Many are not able to weather the storm, especially as economists suggest that this recession has the potential to be one of the longest on record. If a business cannot reconcile its cash flow with its payment obligations, insolvency could be a likely resolution. As a manager, what can you do to respond to this possibility?
1. Seek Independent Advice
Firstly, you should endeavour to reach out for independent financial and legal advice. Even if you do not have the whole story regarding your business's current financial stature, it can help to bring in expert counsel for guidance on your next steps. At best, they can assist you in the drawing up of equitable plans for correcting course; at worst, they can assist you with the insolvency process.
2. Re-Address Client Payment Terms
If you can increase your business's cash flow in the short term, you can stave off the likelihood of insolvency by continuing to meet payroll and creditor obligations. There are several ways you can approach this, but one of the easiest is to reach out to your longer-term clients regarding a change to your payment conditions.
Many long-term and regular customers may enjoy relaxed payment terms as a gesture of goodwill. Temporarily shortening these terms can turn your clients’ credit balance into real money – giving you a significant cashflow boost to appease investors, stakeholders, and your business’ own creditors.
3. Cut Costs
A less savoury approach to maximising your business’ cash flow involves reducing the costs inherent to your business. For many businesses, the most significant cost is that of staff. Unfortunately, you may be in a position where some tough decisions regarding your employee cohort need to be made. Reducing the size of your workforce can reduce cost burdens and improve your chances with creditors.
4. Seek Funding
As a last resort, you may want to consider seeking additional outside funding to plug the gap for your business. Debt can be a good thing, even if your business already has debts. Consolidating your debt by paying off your most urgent of creditor obligations can help buy time as well as stability.
