Thursday, February 22, 2024

When should I contact an insolvency practitioner?

When should I contact an insolvency practitioner?

According to the latest official Insolvency Service, England and Wales are currently experiencing the highest rates of corporate insolvency in 14 years.

What this translates to is an increasing number of North East businesses struggling to keep up with cost increases and revenue headwinds, becoming closer to no longer being financially viable.

Appointing an insolvency practitioner doesn’t always mean liquidation. Their job is to help business owners find a way to prevent the company from reaching this critical point. If there is a chance of returning to solvency, they will look at ways to address their financial situation and find a way to restore financial stability, to avoid a formal insolvency process wherever possible.

Much of the work carried out by an insolvency practitioner goes ‘under the radar’ to ensure potential issues are identified and averted before they happen. The sooner this work can start, the more likely it is that an appropriate turnaround solution can be found for the business. 

What are the signs of distress?

There are a number of recognised signs of business distress that may indicate problems are brewing within a company. Here are five common signs for business owners to watch out for:

  1. Cashflow – cash headroom is often an early indicator.  If you are constantly hitting your overdraft or facility limit, it should prompt you to look at the underlying reasons for this. Is it a working capital issue, which means tighter credit control or stock management may be the solution? Or is there an underlying profitability issue within the business that needs to be addressed?
  2. Falling margins – Declining revenues and increasing costs are also very immediate issues for many at the moment and are having a substantial impact on almost every business sector. What is driving stagnating or falling sales, where have direct costs and overheads materially increased across your business?  To what extent can cost increases be absorbed and passed onto clients and customers?  Identifying the answer to these questions is key to addressing both financial and operational turnaround strategies.
  3. Defaulting on payments – If you’re struggling to settle supplier invoices or pay your tax bills on time, it is a real red flag. Where suppliers are stretched too far this could lead to credit lines being stopped or withdrawn, while missed payment deadlines can lead to a spiral of interest and penalty charges. While HMRC could allow you to defer payments, and lenders and suppliers may give you a little breathing space, this does not offer you a long-term solution. Increasing your borrowing to cover these costs can make your situation worse.
  4. Seeking inappropriate debt solutions – where there is a need for liquidity, directors often turn to the alternative lending market. Whilst that in itself is not a cause for concern, further borrowing for distressed businesses without a supportive turnaround plan can often make your situation worse. Unstructured funding can be expensive and often requires personal guarantees, which can mean owners find themselves in far worse territory personally if things go wrong.
  5. Customer failure – the insolvency of a customer can cause real issues for its supply chain and is often prevalent in sectors such as construction or contracting businesses. Insolvency practitioners regularly see businesses hit hard by a client failure beyond the company’s control. Maintaining regular customer contact, frequently checking credit ratings, and monitoring any changes in terms of trade are always recommended.

Also, keep an eye out for more subtle signs, such as redundancies or departure of key personnel. 

When should you contact an Insolvency Practitioner?

Insolvency and restructuring professionals are there to help struggling companies achieve the best possible outcome in a worrying situation.

If your business is showing signs of financial distress, the overarching message is to ask for qualified advice as early as possible. This often significantly broadens the restructuring options available to achieve a successful turnaround without the need for a formal insolvency process.

Having this conversation may be difficult, but it provides time to make important decisions about your business.