Every day we receive calls from our policyholders asking for help in distressed business situations. For many people who run lifestyle businesses the cash flow is intrinsically linked to the weekly shopping budget and the need to keep the flow of paid invoices is essential.
So, what happens when the flow of inbound payments slows down considerably, and it becomes obvious that you will not be able to meet payments to your suppliers on time?
Strictly speaking, and by its legal definition, the business is insolvent, and you should not incur further debts on behalf of the business. The reality is often quite different and businesses amble on often on the hopeful assumption that the assets of the business will balance the net position. In the process the business’s credit score deteriorates as payments are further delayed and the position is relayed via credit bureaus of the company’s pending failure.
As a company director your conduct is under scrutiny and the range of obligations and fiduciary duties you are expected to manage usually only becomes obvious when the company is in an insolvency process and a need to answer questions about prior conduct arises. If you are reading this and facing some of the problems that have been described then please come and talk to us, it may not alter the course of the business, but it will help you to face your fears without further penalties.
So how can we help?
First of all, it’s important to know the numbers, often called the Current Ratio, where the full value of the assets of the company is divided by the full value of the known liabilities. Many people look at their daily cash balances, but the true picture is only fully available if you have a degree of forewarning for when your cash position turns against you. If you have an overdraft limit it is likely that you are within it every day at this point so it’s an increasingly stressful period of time. Talking to someone impartial with experience of turning such situations around can be vital at this stage. Next, we suggest that if you are trading to the top of your overdraft that you speak with your bank and explain the current trading position. It may be that they suggest a short-term financial remedy if inbound payments have been slow. In some cases, they may provide notice of withdraw of the facility but often offer an alternative way of structuring finance.
Talking to your suppliers and being honest about your position will help enormously. Like the bank they can, if they wish, make life more difficult but most have more sympathy than you would expect and its less pressure than avoiding their calls. Similarly, HMRC are usually more helpful than you would expect and as long as you haven’t let them down on promises historically will be prepared to spread arrears of PAYE and VAT over a greater period of time while current cash flow improves.
This may be obvious but concentrate on your regular overheads, see what items are possibly luxury at this stage and start reducing your overheads. Less popular is the idea of reducing the amount you take personally from the business but if you have personal guarantees that you have provided on behalf of the business it may be a cheaper option in the long run.
An even more unpopular option is to bring your spouse up to speed on the position the business is in. Whilst many directors continue to plough a lonely furrow on that one time has shown that you could do with all the support you can get.
Purbeck Insurance is a specialist Personal Guarantee Insurance underwriter, authorised and regulated by the Financial Conduct Authority. We work alongside lenders and brokers to provide a bespoke insurance solution based on the lender’s individual requirements and risk profile. Please contact one of our specialists today to learn more on 0208 004 7250.