What To Do if Your Company is Having Financial Difficulties

Financial challenges can strike even the most established businesses, often with little warning. As a director or business owner, your ability to recognise early signs of financial distress and act decisively can be the difference between recovery and insolvency.

My comprehensive guide offers practical, actionable strategies to address financial difficulties, whether your goal is to guide your company back to stability and growth or to navigate the complex process of insolvency.

Step	Description
Engage with Professional Advice	Seek guidance from insolvency practitioners, accountants, or legal advisors specialising in corporate recovery.
Create a Cash Conservation Plan	Maximise cash reserves and cut non-essential spending to stabilise your company’s finances.
Boost Sales	Focus on increasing sales to existing customers through targeted promotions, bundled offerings, and referral programmes.
Communicate with Creditors	Engage openly with creditors to negotiate favourable terms and prevent aggressive collection actions.
Streamline Operations	Optimise your business model by focusing on core profitable areas, discontinuing unprofitable lines, and improving efficiency through outsourcing and technology.
Manage Your Workforce Sensitively	If redundancies are necessary, handle them with care, consult employees, consider alternatives, and comply with UK employment laws. Offer support for affected staff members.
Prioritise Debts	Strategically prioritise debts, starting with statutory liabilities, employee wages, secured loans, key suppliers, and then unsecured creditors.
Meet with Your Bank or Lender	Schedule a meeting to discuss financial difficulties and explore options such as overdraft extensions, payment holidays, or new financing solutions.
Consider Government Support	Stay informed about available government support schemes for businesses facing financial challenges by regularly checking the gov.uk website or consulting with your financial advisor.
Consider Pre-packaged Administration	Explore pre-pack administration to preserve business value and ensure continuity by arranging the sale of assets before formal insolvency procedures.
Consider Formal Insolvency Procedures	If informal negotiations fail, evaluate formal insolvency options such as administration, company voluntary arrangements (CVAs), or liquidation.

Steps to Take for a Company In Financial Difficulties

Engage with Professional Advice

When facing financial challenges, accessing expert advice can be a turning point for your business. Reach out to insolvency practitioners such as ourselves, your accountant, or a legal advisor who specialises in corporate recovery.

Key benefits of professional advice include:

• A fresh perspective on your financial situation
• Expertise in navigating complex insolvency laws and procedures
• Assistance in developing a robust turnaround strategy
• Guidance on directors’ legal responsibilities during financial distress

Create a Cash Conservation Plan

The objective here is to stabilise your company’s finances by maximising cash reserves and minimising non-essential spending.

Start by conducting a thorough review of all your expenses to pinpoint where you can cut costs without critically harming your operations. This might involve renegotiating contracts, delaying non-urgent purchases, or finding more cost-effective suppliers.

Additionally, focus on enhancing revenue streams that require minimal investment to improve. Efficient cash management during this time is crucial, as it provides a buffer that allows your business more flexibility in its decision-making and helps avoid further financial strain.

Boost Sales

While it may seem counterintuitive during a financial crunch, focusing on sales can be a vital lifeline. Concentrate on selling more to your existing customers – it’s often quicker and more cost-effective than attracting new ones.

Consider these strategies:

• Launch targeted promotions to your customer base
• Offer bundled products or services
• Implement a referral programme
• Provide incentives for early or upfront payments

We’ve seen SMEs successfully weather financial storms by creatively adapting their offerings to meet changing customer needs, often without significant additional investment.

Communicate with Creditors

Open and honest communication with creditors is essential when your company is in financial distress. Proactively approaching creditors to discuss your financial situation can lead to more favourable terms and prevent aggressive collection actions.

Start by preparing a clear and realistic proposal that outlines how you plan to address the outstanding debts, whether through renegotiated payment terms, partial repayments, or a structured settlement plan. Demonstrating a commitment to resolving the situation and keeping creditors informed about your progress can build trust and potentially secure their cooperation in finding a mutually beneficial solution.

Streamline Operations

Reassess your business model and focus on core, profitable areas.

Consider discontinuing unprofitable product lines, outsourcing non-core functions, optimising your supply chain, and embracing technology to improve efficiency. The goal is to create a leaner, more agile organisation better equipped to navigate financial challenges.

Many businesses have found that streamlining operations not only helps in the short term but also positions them for stronger growth once market conditions improve.

Manage Your Workforce Sensitively

If staff reductions become necessary, handle the process with care and empathy. Consult with employees openly, consider alternatives like reduced hours, and ensure compliance with UK employment laws regarding redundancies. Offer support for those affected, such as outplacement services.

Your remaining staff are crucial for recovery, so maintain clear communication throughout the process.

Prioritise Debts

When your business faces financial difficulties, strategically prioritising certain debts is crucial. Not all financial obligations carry equal weight or consequences, and failing to address the most critical ones can rapidly escalate the crisis.

Consider the following hierarchy when prioritising debts:

1. Statutory Liabilities: Taxes (such as VAT, PAYE, and Corporation Tax) and National Insurance contributions should be at the top of your list. HMRC has significant enforcement powers and can petition for your company’s winding up for unpaid taxes.
2. Employee Wages: Failing to pay staff can lead to rapid deterioration of morale, productivity, and can trigger constructive dismissal claims.
3. Secured Loans: These debts are tied to specific assets. Defaulting could result in the loss of essential business assets, severely impacting your operations.
4. Key Suppliers: Identify and prioritise payments to suppliers critical to your ongoing operations.
5. Unsecured Creditors: While these should not be ignored, they generally pose less immediate risk to your business operations.

Remember, communication with creditors is key throughout this process.

Meet with Your Bank or Lender

Your bank or lender can be a crucial ally in surviving financial difficulties. Schedule a meeting to discuss your circumstances and explore potential solutions. They may offer temporary overdraft extensions, payment holidays on existing loans, or new financing options to ease cash flow issues.

Be prepared with a detailed business plan and cash flow projections to demonstrate your commitment to recovery. Your ability to present a clear path forward can significantly influence the support you receive. In many cases, we’ve seen banks provide crucial breathing space when presented with a well-thought-out recovery plan.

Consider Government Support

The UK government continues to offer various support mechanisms for businesses facing financial challenges. While high-profile schemes like furlough have ended, new initiatives continue to emerge. Stay informed about these opportunities by regularly checking the gov.uk website or consulting with your financial advisor.

Consider Pre-packaged Administration

Pre-packaged administration, or “pre-pack,” is an insolvency procedure in which a company’s assets are sold immediately after it enters administration, having arranged the sale in advance. This method is tailored to preserve a business’s value by minimising the negative impact prolonged administrative processes can have.

A key benefit of pre-pack administration is its speed, which not only helps in preserving the business’s value but also in ensuring continuity. The business can often keep running under new ownership, which is crucial for saving jobs and maintaining relationships with suppliers and customers. Moreover, the costs associated with administration can be lower, potentially leading to better outcomes for creditors.

Consider Formal Insolvency Procedures

When informal negotiations with creditors do not lead to a sustainable solution, it may be necessary to consider formal insolvency procedures. These procedures, such as administration, company voluntary arrangements (CVAs), or liquidation, offer structured ways to deal with company debts while potentially allowing the business to continue operating or ensuring a more orderly wind-down.

Key options include:

• Company Voluntary Arrangement (CVA): Allows you to reach an agreement with creditors about repaying debts over time.
• Administration: Protects your company from creditors while a restructuring plan is devised.
• Pre-packaged Administration (“Pre-pack”): Involves selling your company’s assets immediately after entering administration.
• Liquidation: As a last resort, this involves selling all company assets and closing the business.

Are you facing financial difficulties? Contact Company Debt today to explore your options and find a tailored solution.

How to Identify a Company in Financial Difficulty

Category	Indicators
Business Performance	– Decline in reputation and market perception – Falling gross profit – Frequent relaunches and rebranding – Resource-diverting new projects
Operational Changes	– Reduced staff morale – Altered management structures – More contentious disputes – Changes in contractual performance
Financial Management	– Erratic payments to creditors – Departure of key financial staff – Refinancing or seeking new funding – Creditors initiating formal actions
Employee and Management Feedback	– Gossip and unsolicited staff comments – Reports of staff departures and new managers – Observations of low stock levels during site visits
External Media and Public Records	– Reports in national and local news – Industry journals and user forums – Internet news alerts
Internal Financial Records	– Changes in customer payment behaviour – Signs of erratic delivery or inconsistencies in stock records
Companies House Information	– New or released security registrations – Cross-guarantees and debentures in corporate groups – New director appointments
Legal and Insolvency Status	– Cash flow insolvency (unable to pay debts) – Balance sheet insolvency (liabilities exceed assets) – Unsatisfied judgment debts and statutory demands