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Carl Faulds’ insolvency article for 200,000 members of FSB

I was recently asked to write an article for a magazine produced for the 200,000 members of The Federation of Small Businesses (FSB), and a copy of the article is reproduced below:....

The warning signs of insolvency problems for a business are usually fairly obvious, reduced sales, cashflow pressure and constant battles with suppliers, the bank and landlords chasing for money, but can best be summed up as a feeling of dread in the pit of your stomach, sleepless nights, denial, relying on that big future order that has been promised, but is slow to materialise.

So what can be done? First, take a step back and a deep breath.

The key to dealing with insolvency is to be proactive. Identify the underlying problems and list what you intend to do to solve them. To do this you need to know the current financial position of your business and it helps if you prepare monthly management accounts and use the information to review the actual results versus forecast every month. Look closely at where you earn your profit and cut out non contributing elements that take up disproportionate time or resources, particularly cash, remember it is profit that matters not the size of the sale. Make sure that you invoice promptly and have a clear credit control procedure in place to make sure you get paid promptly, it is possible to train your customers to make sure that they get used to paying on time and consider referring overdue debts to a reputable external debt collector, a customer that doesn’t pay is a cost not a sale. Beware of desperation setting into your mindset and don’t get carried away by the prospect of new customers, maintain discipline and credit-check them all, but not blindly, also use your own judgement and nose to smell a rat.  You can also protect yourself to some extent by including retention of title ("ROT") clauses in your trading terms.

If your plan is going to take some time to implement and cashflow is running out, consider whether asset-based lending, particularly over book debts, can turn yours assets into cash, but also be aware of the terms of the lending agreement and particularly the penalty costs on exit. You could also propose an informal arrangement with some or all of your creditors, it helps if you approach them early enough and explain that the company has cash flow problems, but you have a plan to put things right.

Finally, if the feeling in the pit of your stomach is getting worse, or you just feel overwhelmed Nobody wants to see a business fail and there is plenty of help available from  licensed Insolvency Practitioners or experienced accountants.  They will be able to offer support and most importantly will take some of the pressure off by providing clear objectives and direction. This is particularly the case if you need help to pull out of the downward spiral of fire fighting daily problems and get the focus back on resolving the fundamental issues. An insolvency Practitioner will also be familiar with all the legal pitfalls and be able to advise to ensure that you don’t make matters worse by inadvertently breaching the law and making things worse for yourself. 

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