There are certain to be highs and lows throughout the lifecycle of most businesses. If you encounter financial difficulties, it is worth understanding your legal position if the worst does happen. Here are some points to be aware of which could reduce the chances of your business becoming insolvent.
1. Know your business
A clear business plan will go some way to ensuring a stable financial environment. You should aim to update this in accordance with changing market conditions in order to avoid problems further down the line.
2. Understand the market
By having a clear picture of the market you’re operating within you can ensure that you are maximising potential opportunities to profit. By considering the demand and average costs of products within the market you can weigh up whether your venture is commercially viable. Don’t be afraid to diversify your business interests in order to remain competitive within the market.
3. Account production
It is essential to keep on top of your company accounts to mitigate the risks of financial difficulty. By preparing annual forecasts you will stand a much better chance of achieving your financial goals. You should ensure that you update the forecast on a regular basis to incorporate circumstantial changes. You should also review your actual figures against forecasted figures with a view to taking corrective action to reduce a deficit.
4. Credit Control
No matter how successful your business model is, you will soon encounter difficulties if you’re not being paid for the service you’re offering. Having a credit control function within your business could help to ensure a steady cash flow and in turn safeguard your financial position. It is also worth assessing the credit worthiness of a client before conducting business with them. You should also explore the possibility of early settlement with your creditors.
5. Workforce consideration
It may be an idea to pay close attention to your staffing requirements. A negative shift in the economy could mean that your business may benefit from operating on a leaner structure. Revert to your business plan and reassess whether a successful output is dependent on employing large numbers of staff. Staff are likely to think with their feet if you are unable to pay them. As such it is best to take early preventative steps.
6. Keep people informed
Engagement with key stakeholders to your business will help you with negotiations in the long run. Your employees will be more receptive to change if they have been kept informed on business change through periodic communication. Similarly, the banks are likely to be more sympathetic to assisting you through financial difficulties if you are up front with them form the outset.
7. Prepare for worst case scenario
You can be forgiven for being optimistic in terms of your business’ prospects for success. That being said, you should always have a contingency plan in place should you run into financial difficulties. Diversifying your risk across different clients may give you a greater chance of weathering the storm in difficult times.
8. Consider alternative finance streams (asset-based lending etc)
If your business is experiencing difficulties borrowing from a bank, it may be worth considering different funding methods. Concepts such as crowd-funding are becoming a popular finance stream. In addition, you could also look to generate additional cash flow through asset-based lending. It’s worth noting that you will need to ensure that your debt is settled prior to the sale of said assets.
9. Negotiate with creditors/Suppliers/Landlords
Clear communication with your creditors could ease the financial burden if you can provide them with reassurances of regular payments. Take time to consider how you can apportion the funds you have across the list of creditors that you have in place. Once your position is more stable you can return to offering payments in full to each creditor. You may also want to speak to suppliers to discuss an extension of payment terms. Landlords may also be willing to offer you a reduction in rent if they realise you are at risk of insolvency.
10. Don’t delay
The key point to take away from this is that it’s important to face up to potential challenges at an early stage. Speak with your accountant to ensure that your finances are on track. It is also important to consult your solicitor to understand the legal implications of potential financial difficulties. More specifically they can advise on your position in relation to shareholder agreements, personal guarantees, debentures and fixed charges on your premises.