10 top tips to avoid placing a company into formal insolvency

As licensed Insolvency Practitioners, we at Frost Group meet with the directors of many companies who are unfortunately unable to avoid formal insolvency procedures such as liquidation, company voluntary arrangement or administration.

Our many years of experience in the insolvency profession have led us to compile our 10 top tips for avoiding formal insolvency for your company.

1. Have a formal business plan

Prepare a business plan and update it regularly. The plan should detail the desired direction of the business and set out how this is to be achieved.

2. Know where your business is and control where it is going

Be sure that you know the current financial position of your business and control it so that it heads in the right direction – prepare forecasts for at least a year ahead and update these monthly; prepare monthly management accounts. Clients tell us they do not have the time to produce management accounts. In reality, they don’t have the time NOT to.

3. Know your market

Ensure that you know your marketplace, so that your product(s) is/are properly priced and marketed. This process should be an ongoing one.

4. Spread your risk

Do not place too much reliance on one customer or supplier. Consider obtaining credit insurance against a customer’s failure to pay. Take any guarantees that you can.

5. Never forget that turnover is vanity, profit is sanity, cash is king

Have clear credit control procedures, detailing how problems should be dealt with. They should be cast in stone irrespective of the customer. Consider employing external debt collectors on a no-collection, no-fee basis. Credit-check all new customers. Review all customer credit limits annually and don’t be afraid to amend the terms or limits.

6. Consider other sources of funding

Asset-based lending can turn assets into cash if funding is a problem, and invoice discounting is a good way of financing a growing business. Beware, though, it’s important that any secured debt is extinguished once the charged asset is disposed of and factoring debts can exacerbate any financial problems in businesses that are not growing.

7. Use retention of title effectively

If suitable, include a retention of title (RoT) clause in your trading terms. Ensure that the clause is drafted by a solicitor, giving you maximum protection. If a customer becomes formally insolvent, attend the customer’s premises as soon as possible to schedule and agree the goods over which you are claiming RoT.

8. Do not sit back if a customer goes bust

If you are owed money, notify the appointed insolvency practitioner of your claim as soon as possible, to maximise your involvement. Do not assume that you will receive nothing, but conversely do not assume that you will receive an early dividend.

9. Reassess if the unexpected happens

If the event of death, divorce, fraud or other problems, don’t simply assume that the business will continue unaffected. Reassess the position and seek professional advice quickly.

10. Take professional advice early

Take professional advice from a licensed Insolvency Practitioner immediately if you think that you’re heading towards insolvency. This will safeguard your position and help you avoid personal liability.