Keith Tully, partner at Real Business Rescue, outlines the warning signs you need to act upon if your business is in financial distress.
Whether it creeps up slowly, or hits like a bolt from the blue, bankruptcy is a devastating blow for any business owner.
But looming bankruptcy doesn’t necessarily signal the end of the road for your business. Recognising, and acting upon, the following early signs could bring about a positive end to a potentially bleak situation.
How can a winding-up petition end well?
A winding-up petition is the threat of court action by a creditor, with the intention to liquidate a company.
The creditor will probably have attempted to collect payment in the months leading up to the petition, and this is the last resort to recoup what is owed.
In many instances, HMRC is the creditor trying to collect tax liabilities. But once a winding-up order has been granted, other creditors may be alerted and take action to recover their debts.
So what are some of the operational circumstances that could lead to a winding-up petition being served, whether by HMRC or another creditor?
- unexpected loss of one or two significant customers, causing a sudden fall in turnover
- lack of available credit
- shortage of cash due to overtrading
- failure to successfully negotiate longer repayment terms
Essentially, any or all of these circumstances may lead to the inability to pay bills on time.
Unfortunately, this is what happened to a well-known rugby league club, which had received a winding-up petition from HMRC after failing to negotiate a repayment agreement. External funding was sought but remained elusive, leaving the club in dire straits. After administrators were called in, the business plus assets were sold to a consortium of local business people who were also fans of the team, saving jobs and keeping the club in operation.
Another case in point was a long-established value clothing company which had also received a winding-up petition from HMRC. In this instance, the economic downturn, which hit the retail sector very hard, was to blame for falling turnover and significant cash flow problems, though the business itself was still potentially viable with some restructuring. A buyer was quickly secured for the business and the majority of jobs were saved, with no cessation of trade or loss of customer goodwill.
How can a business recover from company administration?
Company administration is a formal procedure aimed at avoiding liquidation as a result of creditor action. It can be a good option if creditors are threatening to take you to court, and are relentless in their attempts to recover monies owed.
Positive outcomes of company administration can include saving jobs, preserving business continuity and reducing losses, all of which were experienced by the retail business mentioned above.
Can a business survive after losing a significant customer?
It has been said that no one customer should account for more than 10% of your turnover – in other words, don’t put all your eggs in one basket. If that customer decides to go elsewhere, your options are limited.
This happened to a previously stable and successful media company, which suffered a huge fall in turnover following the loss of two significant customers. The directors were resigned to the fact that the business was insolvent, but having stabilised the cash position, it still represented a viable business going forward.
A restructuring plan was immediately put into action, whereby debt was refinanced and private equity funding sourced. As a result of this stable financial structure being in place, control was regained and numerous jobs were saved.
Many company directors and sole traders fall into the trap of thinking company insolvency is an unassailable position. But there are solutions available, it just depends on individual circumstances as to which one is the most appropriate – and seeking professional help before the rot truly sets in.
About the author
Keith Tully, from Real Business Rescue, part of the Begbies Traynor Group, is a leading corporate insolvency specialist. He has over 25 years’ experience in advising company directors in times of financial uncertainty.