At a glance

• The difficult economic forecast in 2023 means that more companies will face scale-backs or closure.
• Using reliable cash-flow data will provide early information on financial problems, so you can take steps to avoid closure, or limit liabilities and protect your employees in the event of insolvency.
• Speaking to professionals such as financial advisors and accountants can help you get a better idea of where you stand, so you can take the best recourse.

With a tough 12 months ahead, insolvencies are rising¹ and more businesses will have to reduce liabilities, scale back or even close in 2023. If you face this situation, it’s crucial to protect yourself and your staff.

After the UK economy dipped into recession² in the third quarter of 2022, the Bank of England forecast the downturn could last into the first half of 2024.³ Even the usually optimistic Confederation of British Industry (CBI) predicts the recovery won’t start until late 2023.⁴

With 40% of businesses having less than three months’ cash reserves,⁵ it’s critical to be on top of your finances, with a robust cash-flow forecasting model that shows your company’s ability to deliver on its promises. Reliable financial information is vital in getting early information to head off potential insolvency and be ready if you still have to sell, scale back or close.

How to avoid insolvency

Andrew Shepperd, Co-founder and Director of consultancy Entrepreneurs Hub, says good data is essential. “When times are tough, you’ll get peace of mind just knowing where you are. Your data might show that, with some changes, you can make it through in 12 to 18 months and face the challenges with more confidence,” he says.

There could be many things you can do to avoid closure. These include increasing efficiency through automation, cutting non-essential costs, improving credit collection, pushing for better payment terms with customers and suppliers, renegotiating bank loans, reducing supply-chain risks, or selling non-essential assets. If one or two unpaid invoices could tip you into insolvency, consider trade credit insurance, which protects you against non-payments.

Conduct a thorough analysis of profit in each business segment, and make sure cutting back in one segment does not adversely affect another.

Ask yourself tough questions, such as: have you focused too much on pet projects and neglected more profitable areas? Have you kept yourself busy with day-to-day tasks but avoided tackling core threats to profitability? Have you taken on too many low-profit customers and do you need to be more discerning? Maybe you need to focus on improving your customer proposition, and actually invest more in marketing and salespeople?

Face up to these issues, regardless of your emotional attachment to staff or parts of the business. This is where impartial advice could help.

“Talk to your accountant and financial planner to get a full picture of your standing,” says Andrew. “Do you have to close, or are there other options? For example, could you sell all or part of your business to a larger firm that could use economies of scale to run it more efficiently and underpin staff employment? Large companies often buy small ones just for ‘team and tech’ – the revenue is so small, it’s inconsequential, but the value of staff and their skills can take years to build, so a larger company may be attracted and, by acquisition, instantly add that skill competency to their business.”

What happens if a company goes into insolvency?

Insolvency happens when your company can’t pay its debts, either because you can’t pay bills so run out of cash, or you have more liabilities than assets.

Steven Mason, Insolvency Practitioner and Senior Manager at insolvency and corporate recovery practice Inquesta, says to protect you and your employees during insolvency, you must understand your responsibilities under the Companies Act 2006 and Insolvency Act 1986. This includes not giving preferential payments to creditors; trading while insolvent, except in situations outlined below; or taking customer deposits with no prospect of providing the agreed products or services.

If you’re planning to bounce back with a new start-up, any new trading name must not imply association with a previous limited company.

Reducing your liabilities at this stage could help you come back stronger. Hopefully, you’re already a limited company, which means the owners’ personal liability for business debts is limited to the amount they invested in the firm. This means you’re not personally responsible for paying the firm’s debts if it closes.

Avoid offering personal guarantees on business loans, as these could make you liable. If you’ve given such guarantees, try to negotiate them out of agreements. Where possible, move family members out of the business, especially if they’re inactive.

Ensure you understand employees’ rights in insolvency, such as around redundancy, and the Protection of Employment (TUPE) rules if selling a going concern.

If making a solvent liquidation, get advice on the tax implications - for example, any remaining profit in the business will be taxable, but you may be eligible for Business Asset Disposal Relief.

Keep good records in all cases.

How to keep trading and protect employees during insolvency

If your company is insolvent, you may be able to take actions that allow you to keep trading.

Start by getting advice from Citizens Advice, or a solicitor, accountant, insolvency practitioner, financial adviser or debt adviser – including the Insolvency Service or Business Debtline.

To continue trading, Directors can:

• Try and reach an informal agreement with creditors. This option is usually for those with temporary financial difficulties, with no immediate threat of formal action by creditors.
• Enter a company voluntary arrangement (CVA), a binding agreement with creditors to pay debts over an agreed period. The company can continue trading, buying you time to streamline and avoid job losses.
• Go into ‘administration’, which involves handing your company to an insolvency practitioner. This offers some respite from creditor action and enables you to continue trading, sell property and potentially save jobs. A creditor can also place your company in ‘receivership’ by appointing an insolvency practitioner to recover money owed.
• ‘Close’, ‘liquidate’ or ‘wind up’ your company, which means selling assets and distributing the proceeds to creditors.

Your personal situation could be a key factor in your decisions during this difficult time. For example, how do you assess your and your family’s health, finances, lifestyle and aspirations? When were you planning to retire or semi-retire, and could you bring that forward? What’s your personal tolerance for risk?

How we can help

Speaking to us will help you get a much clearer view of your current standing and help you formulate short and long-term plans that protect you and your employees.