Businesses are not being helped by the economic climate, but good and effective management should be able to exert market understanding and navigate these issues. Yet, we continue to encounter directors who do not realise how close they are to an insolvency.
The earlier interventions are taken, the more solutions there are, such as securing financing on better terms, allowing more time to engage with shareholders, suppliers and creditors.
There are also practical factors to consider; the earlier directors take advice, the more options a business will have. It is critical to know what those options are as soon as possible.
Having assessed those options, communication is the next important step, providing clear and credible information to those that matter as soon as you are able. All of this is easier to collate and deliver ahead of time, rather than when the business is about to hit the buffers.
Directors and management are not the only ones affected by insolvency. Employers must consider their workforce too, for example which employees are critical to the business and where rationalisation might save the business. It is important to be clear and decisive on these issues.
It will not always be practical to follow an extensive dismissal process to exit an employee and there is always the potential danger of claims against the business in any event. In these cases, settlement agreements can present a commercial option to save management time and reduce risks.
Where the buck stops
When an insolvency occurs the liquidator will scrutinise every decision made, and with directors and management ultimately responsible for those decisions you need to be confident they are sound, or else risk finding yourself in the firing line.
Instructing a firm that can help manage both the insolvency and your personal risk is key. Look for legal partners with experience in financial distress and insolvency, as well as those that can support you with concerns around personal risks and future roles.
Final thoughts
While insolvencies can sound complex, ultimately it comes down to cash flow. Businesses reach insolvency when management and directors overreach.
Nowadays, against the economic backdrop of tighter lending and cost inflation, anyone trading has to be more conservative and even well-managed businesses can find themselves in difficult situations.
Despite this, the rise in insolvencies should not deter entrepreneurs; it is those new businesses and tapping into growth sectors that will help our economy boom. And it is positive to see eight in 10 (79 per cent) of small business owners expect to grow their business over the next 12 months.
