How to Avoid Insolvency and Manage Cashflow

Colin Saville, Chamberlain & CoEditors Note: Expert content needs an expert content writer and Yorkshire Powerhouse is pleased to publish this business advice article on understanding insolvency, kindly written by a real expert in his field – Colin Saville from Chamberlain & Co.

Please consider contacting Colin to assist with any business recovery or insolvency issue – just click on the advert links above or below – and please mention Yorkshire Powerhouse if you do make contact.

Success in business and avoiding insolvency is all about managing your business risks. This can be achieved by focusing on 4 key areas

  • Ensure that you have sufficient working capital at all times to maintain the business
  • Build in the flexibility to react to changes/loss of sales
  • Manage and/or Insure against the Big Risks
  • Ensure the soundness of your trading counterparts

Working Capital

In order to provide the maximum opportunity to ensure sufficient working capital;

  • Formulate a business plan and cashflow forecast and make provision for sufficient Initial Share Capital to match that plan and forecast
  • If using Shareholder Loans/Investor funds, utilise written agreements/security documentation to formalise demand and repayment terms. This provides legal clarity and allows you to plan repayments
  • Retain Profits from annual trading within the business
  • Restrict borrowing to what is demonstrably affordable – factor this into cashflow and profit and loss forecasts
    • Match the credit terms you grant to customers with credit terms you are able to obtain from suppliers. Do not be tempted to allow your principal customers longer to pay than you are allowed by your suppliers.
  • Match funding terms with funding requirements – e.g long term assets to be funded by long term loans or asset finance
  • Ensure working capital is sufficient to meet all known operating costs and provide a buffer in the event of short term loss of sales

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Flexibility

Building in flexibility to manage major costs, e.g property and employees;

  • Don’t enter long leases without regular break clauses
  • Consider use of serviced offices with short notice periods
  • Enable employees to work from home
  • Introduce incentivised pay for employees – this should assist efficiency and productivity
  • Utilise detailed contracts of employment, together with clearly defined appraisal systems and disciplinary processes. This will make it clear what is required of employees and provide a structure for the removal of unsuitable employees with a minimum of legal risk.

Managing Risk

The following Big Risks can be managed or insured against

  • Bad Debts – Obtain Credit Insurance in respect of balances due from substantial customers or, where possible, seek ‘payment on delivery’ or on 7 day terms. As an absolute minimum insist that customers pay within industry normal terms. Prior to supply always insist that your customer signs a contract including your retention of title to goods supplied until you have been paid in full within your terms and conditions. Seek contractual protection e.g nominated supplier status.
  • Product and Employee Liability Cover – Establish Quality In-house Processes – Obtain Accreditation for the processes employed (This is likely to reduced the premium cost of Product and Employee Liability Cover ). Document and update risk assessments. Always act on the findings
  • Protect Intellectual Property – Register Trademarks, brands and designs – Ensure your service levels set you apart from competitors with similar product offerings.
  • Obtain cover for Health and Safety Issues – Costs relating to damage to property or employees/enforcement notices can be catastrophic. Conduct Regular Risk Assessments whether for e.g Fire or General and Industry Specific Hazards. Always act on findings. Establish policies and processes “a health and safety culture”

Monitoring Customers

Key to success in trading is in choosing the right customers and regular monitoring of their position

  • Financial Monitoring of customers is widely available via products offered by banks or accountants. Subscribing to information provided by credit referencing agencies also provides ongoing information on the health of current or potential customers which will assist your decisions on the terms of trade to be offered to those customers. Once these have been established, ensure that you enforce your credit terms. Do not continue to trade with those who consistently pay outside terms
  • Establish Customers’ Values – do they have a reputation as good payers? – larger companies are required to disclose average payment days in accounts – check this information.
  • Understand trade characteristics, e.g construction companies commonly seeking to stretch contract terms – public sector/councils more actively spending their budgets February to May
  • Have a plan B, i.e have contingency plans for alternative sources of finance, alternative suppliers, alternative markets and alternative ways of delivering products or services – retaining flexibility in your business model

In the event of your business or the business of your customer suffering difficulties (as a result of the issues highlighted above) it may be necessary to consider restructuring or reorganisation of your business or an alternative approach or source when it comes to financing your business.

The truth is that sometimes, running a business can be hard, demoralising work – if you’re worried about your own business health and want to avoid insolvency then seek professional help from a recovery expert who can guide you through the options available.

Blunt advice on insolvency from Yorkshire Powerhouse

Now you’ve read our advice article on insolvency – have you any more questions?

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