What Are The Early Warning Signs For Insolvency?

If you’re considering starting your own business, make sure you learn the pitfalls to watch out for.

With half of UK start-ups failing within five years, there’s little doubt of the challenges it takes to bring a small business to maturity in the UK.

Statistics show that some 91% of businesses make it through the first year of trading, so the real crunch point comes from the second year onwards. So what is it that causes so many fledgling enterprises to fail?

Here are the most common reasons, along with suggestions for making sure it doesn’t happen to you.

Lack of Cash Flow

Most small business owners have a primary skill: they are bakers, plumbers, consultants. There’s no reason they should have innate skills in business administration and yet running a micro business demands it.

Where there isn’t the budget to bring in professionals, you simply have to get stuck in and do the books yourself and this is where a lot of the problems arise, especially in the area of cash flow.

Adequate cash flow requires sound credit control and timely invoicing, both of which require high levels of organisation.

Where possible, microbusinesses should aim to do at least monthly cash-flow forecasts, providing an accurate forecast of the next six months.

Then agree clear payment terms with your clients and, when it’s your term to invoice, make sure you do so in a way which makes it simple for them to pay you. Using direct debit as standard ensures that you won’t ever remain unpaid because someone’s forgotten.

For businesses which do run into difficulties with cash flow, financial expert Mike Smith from Company Debt comments, ‘invoice finance is a solution which allows you to sell unpaid invoices to a third party, in exchange for a percentage of their value.

For the right type of business, it can be a useful solution although the rates can be higher than traditional finance.’

Threatening Letters

What the Early Warning Signs for Insolvency? Image From Flickr - By Kevin Steinhardt

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Receiving letters from angry creditors, especially if it’s HMRC, isn’t something you want to ignore. These may include payment demands, County Court Judgements (CCJ), or even the threat of bailiff action.

Business owners who dismiss these as empty threats often find themselves confronted with a ‘winding up petition’, which is where a creditor petitions a judge to have your business compulsorily wound up.

The best course of action with all creditor pressure is to keep the lines of communication open, and try to find a workable solution. Even HMRC are open to arrangements in many cases, providing you present them with a reasonable repayment scenario.

Where things have proceeded beyond the threats to the arrival of a debt collector on your door, things get even more unnerving.

While such things are embarrassing and frightening, it’s worth remembering that no debt collector can gain forcible entry to your premises without a court order.

Sheriffs or debt collectors, however, have a right to what is called ‘peaceable’ entry should you make the mistake of allowing them access to your home especially if they trick you into using your bathroom.

The best course of action is to check their accreditation, and then take professional advice immediately after they have left.

Unable to Pay Staff Wages

If you are finding it difficult to pay your employees, or are simply not taking money out of the business yourself, warning bells should be sounding.

It’s worth realising that the moment you find yourself unable to meet your liabilities, you are technically insolvent. If you are a company director, this means your responsibilities shift towards your creditors rather than your shareholders.

Failure to demonstrate you have put creditors interests first after insolvency could lead you open to charges of wrongful trading or directorial misconduct.

You will also run the risk of burning up any goodwill you have built with your staff by paying their wages late, or not at all. Employees have the right, after a time, to make a claim in the employment tribunal.

If you go insolvent, they will become ‘preferential creditors’ for the four-month period leading up to insolvency, and about holiday pay.

Since many microbusinesses are operating as either sole traders or partnerships, there are often cases where employees will commence personal legal proceedings against their employer, since there is no ‘limited liability’ for sole traders as there would be for directors of a limited company.

Late with Payments

What the Early Warning Signs for Insolvency?

Not only do late payments impact your company’s credit score, but they indicate clear problems with the cash-flow cycle which warrant investigation.

Many microbusiness owners simply hope that if they keep their head down they can muddle through. In fact, looking these problems in the face and strategically mapping out solutions is the way to survive where so many others haven’t.

You can’t get any more loans

For many business owners, it’s the sheer force of ambition which becomes their downfall. These types of mavericks take one loan after another, convinced that somehow, it’s all going to end well in the end. Again, this is a problem of lack of experience.

While intuition can be a helpful quality in a business owner, it’s the careful, analytical side which helps with keeping fledgling businesses afloat.

If your bank tells you that they won’t advance any more loans, this is a strong signal that something in the business model isn’t working.

When your time is spent continually problem solving

Although this last point appears less serious than the others, it’s one of those problems which, over time, can scupper the entire business.

If you find that, instead of being out in front of the business, leading it forwards and interacting with clients, you’re mired in continual problem solving, this might be a grave warning sign regarding your company’s health.

Efficient use of resources is when everyone is working to their strengths, and where internal processes are fluid and streamlined. Too much time spent problem solving is worthy of analysis.

Ask yourself, what systems and processes can I put in place to free up my time again? Factor in a monthly review to see how this is working and, where necessary, implement a time tracking APP to see how much time is going on what tasks.

These simple things can be like unblocking a pipe, allowing clean, fresh water to flow onwards into the heart of the business.

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Poppy

Poppy

Poppy is a money-saving expert in the UK.