If your business is losing customers and market share, insolvency and liquidation is clearly a realistic proposition. However, this can also happen if you’re growing and taking on new customers, but paying insufficient attention to your cash flow. In fact, businesses can become insolvent for quite a range of reasons. Some are fairly obvious, such as customers delaying payments or new competitors entering the marketplace, but others are less apparent. Here are a few things you should keep your eye on.
Cash flow problems can make you insolvent
If your business is profitable and growing, you may assume that your cash flow will take care of itself. Wrong. In fact, a phase of rapid growth can be particularly dangerous for your liquidity. Why? Because you will have to invest in new people, premises and raw materials to serve those customers before they pay you. Should they be tardy payers, you could find yourself in a whole world of trouble. Similarly, avoid the temptation to pay yourself a generous bonus during the good times or go on a spending spree for new business assets. If you extract surplus cash out of the company, even a small downturn could be enough to push you over the edge to become insolvent.
Unexpected bills can lead to insolvency
When you’re focusing on keeping customers happy and maintaining a positive cash flow, it can be easy to take your eye off the ball. A sudden tax or VAT bill can knock you sideways – or even off your feet. Make sure you track your tax position carefully and ensure you have the funds in hand to pay bills as they arise.
New kids on the block
The sudden emergence of new competitors may not disrupt your business – in fact, it may be proof positive that you’ve chosen a growing and profitable sector. However, ignoring new entrants to the market, particularly if they’re growing rapidly, is dangerous in the extreme. If they start poaching your customers, your business could enter a terminal decline down the road of insolvency. Study your competitors carefully and anticipate their moves, making sure you continue to innovate and offer the best solutions and value for money in your marketplace. Also, you should always remember that it costs less to retain an existing customer than secure a new one, so service your clients to the nth degree.
Losing a key account
Losing a major customer is always a blow, but some companies become deeply complacent and allow themselves to rely on the business of a single, substantial customer. This puts your business at huge risk – if the customer walks, your doors will close within a matter of weeks. Constantly diversify your client base and never allow one account to grow so large that your entire business depends upon it.
A customer going to the wall
Similarly, if your business is largely dependent on a single customer, then their insolvency will lead to yours. Since you pay in advance for the people, premises and raw materials to service clients, you will still be liable for meeting the costs of an order for which you never get paid.
Excessive debts can definitly lead to insolvency
Most businesses need to borrow for growth at some point. However, if your debts get off hand and start to threaten your cash flow, one month of poor sales or one single overdue invoice could be sufficient to prevent you from meeting your commitments and result in becoming insolvent. Access to a line of credit, which can be used whenever you need it, can be a godsend in these circumstances, but you can also prevent the situation from happening by borrowing cautiously in the first place.
Losing important people
Any business is only as good as its people. Particularly in small businesses, certain employees can be absolutely key – the company cannot continue to do business without them. Make sure your people are multi-skilled so the loss of a team member cannot bring the business to its knees, and carefully benchmark rewards in your industry to ensure that your most important people are well rewarded and feel valued.
What to do if you become insolvent
If the worst comes to the worst, the best thing you can do is talk to Cashsolv. We are experts in insolvency, and we can help you find the right solution to stay in business and avoid bankruptcy. A Company Voluntary Arrangement (CVA) would enable you to restructure your debts and replace your standard terms of business with a new arrangement: for instance, you could agree to pay your creditors a fixed monthly sum for a few years to meet 75% of the total debt.
To learn more about how we can help failing companies, please visit our Cashsolv Company Voluntary Arrangement page.