How to reduce the risk of insolvency in the new normal

How can I avoid insolvency?

A question our business recovery team are frequently asked and, whilst there are a myriad of different ways depending upon the circumstances of the business, it often boils down to:

  1. Cash is king
  2. Avoid disputes
  3. Keep alert – don’t take your eye off the ball
  4. Be realistic – don’t bury your head in the sand

Arguably easier said than done? Here are some things to consider.

Running out of cash can be a result of many different factors but it can be mitigated with good cash management and forecasting. These can enable you to:

  1. Identify inefficiencies;
  2. Reduce uncertainty;
  3. Scope contingency plans; and
  4. Guide strategic direction.

number 1

Identifying inefficiencies

When you take the time to prepare forecasts, you must make a series of assumptions. You can do this by reviewing past performance. For example:

  1. How long does your business take to pay an invoice?
  2. How long does it take your business to collect an invoice?
  3. How long is stock held?
  4. What is the value of WIP locked up?

Following this, the data can be inserted into your cash flows to help build a picture of the future. This will assist in making improvements and paint the future differently to the past.

number 2

Reduce uncertainty

When an economy contracts as a result of a significant event, there is naturally a significant amount of uncertainty. A prospering economy is built on certainty and this breeds confidence, which entail enables additional money to be spent and the economy to expand. We cannot individually influence the macro-economy but we can influence our own businesses by looking to reduce uncertainty within them in order to survive and potentially continue to grow. We can do this by reducing risk in areas such as sales and credit control. For example, the questions you should be considering:

  1. Who are our customers?
  2. What risk do they pose? Have we risk assessed each of them?
  3. Are we insured?
  4. Have we reviewed our terms and conditions?
number 3

Scope contingency plans

By looking at what the future holds and preparing forecasts, you can start to assess the health of your business. You should consider contingency plans earlier for any ‘what if’ scenarios.

Questions to consider:

  1. What if a significant customer stops paying?
  2. What if a significant machine fails?
  3. What if a significant proportion of the workforce becomes unwell?
  4. What if I do end up in a dispute?
  5. What if my key supplier’s insurer pulls cover?
  6. What if my key supplier fails?

number 4

Guide strategic direction

Forecasting can also assist in guiding the business strategy alongside a strategic review. This is where you pull up the business plan and review it. Does it still work? How has the business evolved and, more importantly, how is the business likely to evolve in the coming years? At this stage, you can also start to ask the more difficult questions. These difficult questions are easier to ask when you are not connected to the business as they are also easier to identify. This is where professional advice and assistance is valuable because the challenging questions are what enable a business to really develop. For example:

  1. Is there still sufficient demand for my product?
  2. Do external factors mean adaptations are required?
  3. Can technology make my product better?
  4. What does the customer of today want? Is it just a product or should it include delivery and aftercare?

Sometimes there will no longer be demand for a product. Remember VHS videos? Those that ask questions soon enough will have a better chance of gauging the right time to diversify or wind down the business in an orderly manner.

For further information on the points covered in this article, or to discuss your specific circumstances, please email Bethan Evans, Head of Menzies Creditor Services via her profile below.

Alternatively, read more about our business recovery services.

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