If the business is insolvent, this article deals with what you need to prepare and provide to an instructed Insolvency Practitioner to advise on the options best available to you as a business owner . The Insolvency Practitioner will explore a myriad of options, both formal and informal with the business owners to establish if a recovery is possible and advise on which route(s) are viable for the rescue of the business.
Where a formal process is recommended the insolvency practitioner will also highlight areas of risk to the business owners themselves and direct them to appropriate professionals to advise them independently on their own position. As always this article is a jumping off-point, always DYOR and seek professional advice as early as can.
1. Profitability
Once you have your management information in place (employee tables, span, costs, responsibilities…), the next step is to determine the profitability of the business. The two factors that determine profitability are revenue and costs. You want to ensure revenues are being maximised and costs minimised.
Revenues
Questions to ask about increasing your revenue might include:
- Can we raise prices?
- Are there new routes to market that we can pursue?
- Can we sell through our website?
- Can our customers and clients find, evaluate, and engage with us on social media?
- Do we know the return on investment of our marketing expenditure and are we maximising it?
- Can we improve our product and services offering?
- Do we have a CRM system and is it being used to maximise return on investment?
Costs
Questions to ask about reducing your costs might include:
- Is the size of the workforce matched to the level of output that the business currently needs to produce?
- Processes be changed or improved to reduce the number of hours of staff input required?
- Are redundancies required?
- Can premises costs be reduced or removed?
- Have all other costs been considered as to whether they are still necessary or can be delivered in a better and more cost-effective way?
2. Liquidity
Having considered the business management information and profitability, the next thing to consider is its liquidity as ultimately this is required to settle obligations, invest in systems and talent and of course remunerate the business owners.
Questions to ask about the business liquidity level might include:
- Does the business have a financial model that links the forecast profit and loss account, balance sheet and working capital requirements?
- Does the business have sufficient liquidity to meet all taxes as and when they fall due?
- Is the business up to date with payments to its trade suppliers?
- Will the business be able to generate sufficient cash to repay its borrowings as well as its day-to-day costs?
- A business is insolvent if it cannot meet its liabilities as they fall due. It is insolvent on a balance sheet basis if its liabilities exceed its assets.
3. Risk coverage
Next you should consider what coverage and policies you have put in place. Many of these policies will be the usual policies required to trade, but have you gone further and sought insurance against bad debts? If not, should you? If yes, have you claimed for bad debts?
Questions to consider about your risk coverage might include:
- What policies does the business have?
- What policies does the business need?
- Do I require further coverage e.g. against product liability claims?
- Should I be reducing my coverage?
- Are there claims I am entitled to that I should bring?
4. Business partners
Most businesses will have partners it works with, such as accountants, solicitors, insurance brokers, customers under contract and so forth. Periodically reviewing these partners is crucial to ensuring both best value and best quality of advice.
Questions to consider about your business partners might include:
- Have you utilised financial monitoring / credit check products to ensure your customers can pay you for work undertaken?
- Do your professional advisors have the right experience and knowledge for the sector? For example, does your accountant have knowledge of sector specific tax relief you may be entitled to?
- If you need specific niche advice, do your advisors have access to suitable experts in their network to refer you to?
- Do you review your terms of engagement to ensure best value? Have costs increased but service levels have plateaued?
- Have you considered the credit terms you have agreed with your customers / suppliers and are there any risks to be mitigated?
5. Enter into dialogue
It will also assist if you communicate proactively with key stakeholders, e.g. landlords, employees and particularly your creditors with a view to those parties understanding the position of your business and your ability to pay and therefore an agreement regarding a schedule of payments.
Discussion topics to consider might include:
- What are your intentions with regards to settling debts and can these be agreed with creditors?
- What do you need from your suppliers to improve their services? What do they need from you?
- What can you do for your employees to improve their output? What do you need from them?
Conclusion
Much of the foregoing applies equally to a successful business as it does to those in distress. By taking these steps even in healthy businesses owners will mitigate current and future risks.
For distressed business early engagement with the problems identified will reduce the need for a formal insolvency procedure and, where a formal procedure cannot be avoided, maximise the potential for it be used as part of a restructuring process as opposed to the winding down of the business’s affairs.
Having taken the following steps, you will likely have identified changes you need to make to your business to improve its performance. At this stage it is important to ensure you implement these changes. It may not be practical to implement all the changes simultaneously, so develop a plan for implementation, prioritise the changes to be made focusing first on those that will yield the most benefit, delegate the work where possible, and ensure that the changes are executed.
