The risk of insolvency can be reduced if you monitor your finances. You should compare actual performance against your budget. If problems arise it's important you take action early. You should consider:
- improving cashflow
- negotiating with creditors
- getting advice from professionals
Keeping cash flowing into the business is a challenge. Ways to improve your cashflow include:
- bill promptly to ensure a steady flow of cash
- avoid overtrading by only accepting orders you can fulfil
- recover debts by chasing up debts owed to you
- trim your inventory using a stock reduction plan
- renegotiate your credit limits and payment dates with suppliers
- reduce overheads such as wage costs
You can get advice from your accountant on how to improve your cashflow.
Negotiating with creditors
Don't ignore your creditors. If you are a sole trader and they are owed more than £5,000 or in the case of a limited company or partnership they are owed more than £750, your creditors can apply for your bankruptcy or ask the court to wind up your business.
Talk to your creditors before you become formally insolvent. You should try to renegotiate any deals you have with them. You will need to be realistic and honest about what you can afford to repay them.
If your business gets into trouble you should seek professional advice. This will give you time to assess the alternatives open to you. You should seek professional advice immediately if:
- you cannot cover your debts
- the business receives a statutory demand
- you can't pay staff wages
- there is an acute lack of working capital
Directors should seek legal advice if their company becomes insolvent. See insolvency: directors' responsibilities.