The last couple of years have been challenging for businesses. First, there was a global pandemic to negotiate, and then before they had time to take a breath and recover, the economy has hit businesses with rising fuel prices and costs. Therefore, it is no wonder insolvency figures are rising fast. The Insolvency Service revealed that in March 2022, the number of registered company insolvencies was double the number in March 2021, and 34% higher than those registered pre-pandemic in March 2019.
While there is plenty of financial advice out there focused on the role cash flow can play in pushing a company towards insolvency, there are other risks that a business also needs to manage if they are to avoid the big “I”.
Other insolvency risk factors
Customers failing to pay
All companies will, at some point, find themselves in a position where they have customers who are not paying up. Many businesses do little until they run into a problem, but the right preparation can help you avoid many issues.
For example, how much do you really know about the financial situation of your customers? Do you know when they last filed their accounts, and do you track their credit rating?
Taking a proactive approach to your credit management can minimise many of the payment problems businesses face. As well as looking for warning signs such as trading terms gradually worsening, you should also ensure you accurately bill customers on time, review credit limits regularly, and that your customers make payments within the agreed terms. Management information should also be kept up to date.
Sometimes it can be a new customer rather than an existing one that can lead you towards trouble. Again, as a business, do your due diligence, asking the right questions and doing your research. For example, it’s not uncommon for a business to chase a desired account for years with no success. When that account suddenly wants to trade with you, it can be tempting to congratulate yourself for the hard-fought win.
However, it’s possible there is another reason for them moving to you. Very possibly, the new account has now come to you because their existing supplier has put them on stop or refused credit. That does not bode well for you! You can avoid situations like this by taking up references and having a comprehensive new account opening policy to screen out the hidden hazards.
Another risk factor that could lead you towards insolvency is supply issues. Many businesses don’t plan for a situation in which either their supplier goes out of business or cannot / will not supply them. These have become more common scenarios since the pandemic, with demand outstripping supply for many materials, leading to longer lead times and suppliers often preferring who they supply.
Of course, a well-prepared business would have considered alternatives and have a back-up plan. It’s possible that in doing this work, you could find a more reliable supplier – even, possibly, a local one – both of which could potentially save on time and delivery costs.
With insolvencies on the rise, it’s also worth considering what you would do if an insolvency practitioner blocked goods, as well as making sure you know the trading terms and reservation of title position, which can result in some goods supplied to you remaining the property of the seller until certain conditions in the sale contract are met by you.
However, supply issues can also have further effects on both customers and employees. It’s crucial that you consider whether a problem with your supplier would cause you contractual issues with your customers, such as the risk of being sued, liquidated damages (a fixed penalty for contract breach), or loss of customer. Supply chain issues could also affect your workforce, forcing you to lay off people or reduce their working hours.
But it’s not just material suppliers you need to consider. What would the impact be of issues with an overhead supplier? For example, with an IT provider, this could mean you lose all services, and a landlord could lock the office door.
However, not all risks are external, and companies would do well to look within and assess risk inside the organisation too. Staffing can be a potential area of risk for any business, at any time, but no more so than now during a cost-of-living crisis when employees are looking for increased salaries, flexible working and working from home opportunities. This is where a network of outsourced support, allowing you to scale up or down quickly, can be critical to success – and why EFM as an extension to the team, providing support when you need it at a more competitive rate than a salaried employee, can be an optimal solution.
A plan to reduce the risks
These risk factors, along with cash flow issues, should all be part of your Business Continuity Plan. This should set out how your business will continue operating in the event of an unplanned disruption. If you already have one in place, it’s worth testing it to check that it’s up to date and effective. If you’ve yet to develop one, now is the time.
If you would like professional support and guidance on creating an effective Business Continuity Plan or protecting yourself from the risks of insolvency, book a one-to-one consultation with us here. We can offer you direct access to our team of Business Advisors and a flexible and cost-effective Finance Director, experienced in supporting businesses whatever challenges they face. There is no hiding that this is a challenging time for businesses. However, the right preparation and plans can not only make all the difference to how well you weather the storm, but how quickly and robustly you emerge from the other side.