Experiencing financial distress is not uncommon for businesses; having a strategy to overcome these obstacles is crucial.
For directors of companies facing the prospect of insolvency or dwindling revenues, addressing financial issues promptly can be the key to survival.
Steps to Consider When Confronted With Financial Challenges in Your Company:
- Adopt a Holistic Perspective
- Modify Your Company’s Operations
- Streamline Your Business
- Manage Your Tax Obligations
- Explore a Company Voluntary Arrangement (CVA)
- Consider Entering Administration
- Evaluate Pre-Packaged Administration
1. Adopt a Holistic Perspective
Focusing solely on daily operations or increasing work efforts won’t resolve financial issues. Instead, examine the overall situation.
Identify the strategies that could improve your financial standing, the actions that should be discontinued, and the aspects of your business contributing to monetary losses.
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2. Modify Your Company’s Operations
To prevent future cash flow problems, directors should evaluate the feasibility of existing plans and agreements.
Outsourcing this task may be advisable if in-house staff lack the necessary financial expertise.
Seeking professional advice can also help in renegotiating debts informally, as creditors are often willing to recover their funds.
Establishing a financial buffer can alleviate stress when unexpected expenses arise.
NOTE – You might also find this post useful: How To Dissolve a Limited Company.
3. Streamline Your Business
Focusing on core operations often highlights the most profitable aspects of your business.
This may involve redundancy, asset disposal, and determining the essential resources needed to run the company.
NOTE – You might also find this post useful, talking about how to close a limited company in the United Kingdom.
4. Manage Your Tax Obligations
Refrain from using funds designated for tax payments to cover other costs, as this short-term solution could jeopardise your company’s future viability. HMRC will eventually demand payment for PAYE, VAT, or corporation tax.
A Time To Pay (TTP) arrangement can assist struggling businesses by allowing them to pay outstanding taxes over a predetermined period.
To obtain approval for a TTP, you must present a solid business plan and demonstrate your company’s viability and ability to repay debts during the agreed-upon timeframe.
NOTE – You might find this post useful. It talks about signs a company is failing.
5. Explore a Company Voluntary Arrangement (CVA)
If your company’s debts become unmanageable, a CVA can help consolidate debts and salvage your business.
This legally binding agreement between an insolvent company and the company’s creditors enables debt repayment in part over a set term. At least 75% of creditors must consent to the CVA’s terms.
A CVA can prevent a company from closing, and creditors often favour this option, as it increases the likelihood of fund recovery compared to liquidation.
NOTE – You might find this post interesting asking – When is a company insolvent?
6. Consider Entering Administration
If faced with a winding-up petition, entering administration can help manage the process more effectively.
Although it may seem like an undesirable choice, administration can potentially save your company.
Entering administration involves transferring control of your company to a licensed Insolvency Practitioner (IP), who will manage the business in the interest of its creditors.
This transfer of control legally protects your company from closure or legal action.
Administration provides time for the IP to guide the company towards the best possible outcome.
Failing to seek professional advice can result in a costly, protracted process that may lead to liquidation or asset sale.
NOTE – You might find this post about limited company director duties useful to read.
7. Evaluate Pre-Packaged Administration
Pre-packaged administration involves identifying a buyer for the viable parts of the business and assets before appointing an IP to oversee the sale.
This option offers a faster, more cost-effective, and seamless solution for companies with salvageable components within an otherwise insolvent business.
In the event of insolvency, the most effective rescue strategy involves ensuring that current financial decisions are professionally audited by an independent financial advisor.
If you believe your business is experiencing financial difficulties and require advice on the next steps, please contact our team today.
