Insolvency describes a position in which a company can no longer pay its debts; for example, it can’t pay its bills when they become due, or it has more liabilities than assets on its balance sheet. A company that is insolvent is at risk of shutting down altogether.
Corporate insolvencies rose sharply across England and Wales in the second quarter of 2022. In fact, 5,629 company insolvencies took place between April and June, representing a 13% increase from the previous quarter and an 81% rise over same period in 2021, according to government research. Furthermore, voluntary liquidations have reached their highest levels since the 1960s. Thus, it’s important for organisations to consider how to prevent insolvency. The following tips may help:
- Analyse and improve cash flow. While stocks and assets are nice to have on the books, their value could depreciate. As such, organisations should consider selling off unnecessary or underused stocks and assets to inject business liquidity. If necessary, they may also consider invoice financing or asset-based lending—where companies pay a percentage of an organisation’s outstanding invoices to improve interim cash flow.
- Unclog incoming payments. Organisations can review payment terms with remaining clients to ensure a free flow of cash into the business. Clients should be invoiced regularly, accurately and on time. If customers or suppliers owe monies, swift action must be taken to recover these.
- Reduce overheads. Expenditures can be reduced by assessing cost-cutting strategies. Specifically, organisations may consider relocating to a more affordable premises, reviewing staffing requirements and temporarily cutting back on any “soft” business expenditures (e.g. advertising).
- Negotiate with creditors. If possible, organisations should talk to suppliers and creditors to negotiate manageable payment terms for any debts owed. Additionally, they can contact HM Revenue and Customs about its “Time to Pay” arrangement that may allow tax liabilities to be paid in instalments.
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