Protecting your business against insolvency

By Simon Willmett, FD, Nucleus Commercial Finance

As a Financial Director, some of the scariest words you can hear are insolvency, administration and liquidation – especially when discussing your business. With high-profile insolvencies such as Carillion, the UK’s second largest construction company, and Toys “R” Us, the popular toys shop, all happening over the past year, it would be understandable for any struggling business to be worried.

Luckily, however, there are plenty of fail-safes that you can put in place – no matter if your business is big or small – to spot signs off stress as they happen. These fail-safes work to mitigate or head off the issues before they take-hold and cause irreconcilable damage.

Planning for your business

In today’s climate, businesses cannot afford to ignore responsibility for proactive financial planning from the go. Responsibility ultimately falls to you, the Financial Director, under collaboration with the wider leadership team, to plan.

Your planning must be thorough. It must include a sight of short and long-term business strategies, reflecting growth – new hires, uptake in business activity – and even, in some cases, factors outside of your control as well. As an example, if your business plans to increase your sales team or increase stock retained, your current financial planning could be inadequate. Your plans would need to reactively reflect this.

Using finance to grow 

There still seems to be a certain amount of undue stigma around the use of external finance. The implication being that using any funds other than the cash generated by your business is a sign you are having issues. This however, should not be the case.

Businesses have peaks and troughs to deal with – thanks to a large VAT bill, or seasonable sales changes for example. By recognising this and seeking financial help in advance, you can minimise the impact it has on your business operations, sales and planning.

Heading off distress 

Once you start seeing signs of distress you shouldn’t waste any time in getting the right support and advice. Nothing is worse than seeing a business fail because the senior management team have not tackled the problem head on quickly enough.

Decreasing sales, a high employee turnover, and waning positive customer feedback could all be signs of issues to come. They are subtle but point to an undercurrent of discontent. This discontent in time could lead to the biggest warning sign of all… a lack of profitability. It might sound obvious but if your business is not profitable then you are truly at risk.

Preparing for finance 

Getting the right finance for your business should take time. Products such as Invoice Finance or Asset Based Lending require longer lead-time to research and apply for, and rightly so. You will need information on cash flow, profit and loss, your balance sheet, and order book at your fingertips to ensure the finance is tailored to your needs. To be effective you should know you are going to need financial assistance at least four months in advance – financial planning playing a vital role here.As with anything, the correct product takes time, and as such, it is sensible to allow some contingency time whenever you are relying on external decisions. You can find more information about product types and timings in our helpful timeline. 

Expecting the worst 

If the worst comes to the worst and your business falls into distress, it is crucial that you record every decision formally to ensure you are following the correct compliance processes. You should be consulting your legal and accounting teams as soon as you realise, assessing the extent of the problem with up-to-date cash flow statements and projections, to ensure directors are not personally exposed. Turnaround finance is an option if you can show a strong track record.

In the end, regardless of what happens, you will need to be brave and willing to make difficult decisions quickly. Remember, problems are generally only serious problems when they are not dealt with head on at the earliest opportunity.

Nucleus Commercial Finance