Stress test: Dealing with creditor pressure

Cash flow problems caused by failing to pay HMRC or any other creditor can pose a serious threat to business survival and should never be ignored. Directors should respond quickly to financial distress as escalating debt leaves a company exposed to the risk of compulsory liquidation. By tackling cash flow issues head-on, directors have the best chance of returning their businesses to profitability and creating a stable platform for growth.

How to stop creditor pressure

Professional help
Most companies have cash flow problems at one time or another, and this doesn’t always mean that directors need to seek the help of a professional insolvency practitioner (IP). However, if these problems worsen, getting advice from an IP sooner rather than later can be the difference between liquidation and saving the business.

Good communication
It’s vital that directors maintain regular communication with creditors as they try to negotiate extended payment terms. Adding time on to accounts payable equates to getting a short-term loan, which can provide directors with the time they need to improve cash flow and regain control of the company’s finances. Here, the influence of an IP can help with negotiations as he or she can boost creditor confidence in the company’s ability to pay.

Time to Pay arrangements
HMRC is the most common creditor, and for many directors and the prospect of dealing with the taxman can be daunting. Therefore, it’s crucial to pay tax bills on time and when payment is delayed, HMRC should be notified as soon as possible. The taxman is an aggressive creditor, and there are a couple of options that can protect a business with tax arrears from compulsory liquidation: raising finance and/or negotiating a Time to Pay arrangement.

How to avoid creditor pressure

This involves taking all the financial information available and creating a vision for how the company should operate in the upcoming months. The forecast should show all revenue sources and compare these against expected business expenses. It should also be updated regularly to identify the ups and downs of business income so that directors can make sure that a short-term business loan is in place for when money is tight.

The last 12 months have been filled with political and economic upheaval and the year ahead promises more of the same. With so much uncertainty, directors need to prepare their business to react to change quickly. This means drawing up ‘what if?’ scenarios to cover a number of possible situations, reviewing strengths and weaknesses as well as the actions that need to be taken when things go wrong as well as right. Having policies in place that cover all scenarios will ensure that directors can move quickly should the need arise.

Mike Smith is a director at Company Debt.

Photo © Howard Lake (CC BY-SA 2.0). Cropped.