How to avoid a company liquidation
Liquidation Is the legal endpoint for a company and getting to this point is actually a process.
Think of it like taking the wrong road on your journey, the longer you go down the wrong road, the harder it is to put things right.
In this post, we’re going to highlight the steps you can take in chronological order to avoid liquidation of your company.
Right at the start
The best companies start off with a plan.
Going back to our ‘wrong road’ analogy – it’s like making sure you have a map and deciding what route you are going to take.
Starting off with a defined and realistic business plan will help you understand how much capital you need to generate so that your company doesn’t get into trouble.
Start-ups can either be capitalised through owner savings, bank loans or external investors. Or they can choose to ‘bootstrap’ where they keep expenses very low and begin to generate the cash they need from sales.
Making sure you have free cash is the best place to start from.
There’s an old saying; ‘companies don’t die of lack of profit; they die of lack of cash’ and this is never more true than when we’re talking about liquidation.
Think about some of the most famous companies in the world
Tesla for instance has only made a profit in a very few of the quarters of its existence and the rest of the time has made colossal losses.
It’s thought that YouTube still hasn’t made a profit despite being the world’s largest video sharing site and it took Amazon 14 years to get into the black.
But they are all still operating because, despite being unprofitable they have a war chest of cash to pay their creditors.
The fact is that if you want to avoid liquidation then you need to make sure you have a ready supply of cash.
Keep a keen eye on your customers. Don’t give extended terms and make sure you are strict with credit control.
Have a realistic and detailed cash flow forecast, at least for the next quarter and ideally for longer that way you can spot if there are likely to be any bumps in the road.
And when things are going well then get down to your bank and negotiate a line of credit, because banks are happy to lend to business on good terms when they don’t need the money, but are reluctant to do so when the company actually requires the cash!
Also think about alternative sources of funding like leasing assets rather than buying a checking out some of the different funding platforms that have sprung up over the last few years.
If you make sure you have good access to cash then you’re on the right road.
It’s funny that often, companies that have been an amazing success story as a start-up then begin to struggle.
This is because the directors need different skills when they are a small company compared to when they were a start-up micro business.
Similarly, when they make the move from small to medium, the skill set changes again.
The problem is that as a micro business the company can work in pretty much a ‘hand to mouth’ type way, but the bigger the company gets then the more important it becomes to professionalise.
This is often the point that companies begin to overtrade. After spending their formative years chasing every piece of business they can get it is difficult for directors to choose to then make sure they only take on work that they can actually deliver.
Your cash flow forecast, profit and loss and balance sheet will become your best friends here, so keep your accountant close.
Learn to use these important tools and make sure you fully understand what they are telling you.
Established businesses will often start to get involved in longer term tendering and projects.
When you are doing this kind of work then it is vital that you have a second (or third) pair of eyes look over your contracts.
So often, companies that go into liquidation do so because at some point they have signed contracts that tie them to unprofitable projects or that have onerous penalty clauses.
It’s also important to make sure that you have proper controls in place.
And as the company builds then it may well become necessary to find funds from external investors.
The mature company
As the business matures then so do its customers.
This is where the business is at the mercy of important customers finding other suppliers or going bust themselves.
Similarly, its product or service may become mature and start to lose sales.
And dare we say that the management may also begin to become stale as they settle into a comfortable life!
So the key to stave off any move towards liquidation is to keep innovating, both in product and market but also in staff.
But what if you find yourself already on the road?
Well there are some practical steps you can take to avoid the liquidation of your company.
Step 1 is to make sure you have enough cash to tide you through any remedial action.
Chase your debtors so that you are getting your invoices paid on time and speak with your suppliers in turn and see if you can extend your own terms.
Known as ‘leading and lagging’ this gives you a very short-term boost to your cash in hand and will allow you some breathing space.
If you have a very profitable company but cash is an issue then you may want to institute terms that encourage people to pay early such as an early payment discount.
You may have some personal funds that you can inject or you may be able to extend your overdraft but these come with some heavy health warnings.
Once you’ve done the short term then you’ll need to think longer term and ensure that your business has good cash flows going forward and that it remains profitable.
Being chased for money?
It may be that you already have creditors chasing you in which case you may need to take different action.
If you are at the point where you simply have a few bills that you can’t pay then the best option is to make contact with your creditors and have a chat about the situation. Often, you’ll find that people are happy to wait for their money when the alternative could be getting nothing at all.
If you are running a limited company then you need to make sure that you are not trading whilst insolvent. This is an offence and can lead to the directors facing action including fines so speak with your accountant.
You also need to sit down and have a realistic discussion with an impartial advisor such as your accountant, a business consultant or insolvency advisor about whether your company is actually a going concern or not.
Sometimes people get so close to a situation and are so emotionally involved that they fail to see when a situation is hopeless and taking early action is always preferable in these situations.
Looking at things like releasing cash from unwanted assets, renegotiating leases and rentals and reducing interest rates on borrowings or extending the term are all options.
If the situation is particularly dire then your advisor may suggest either going down the CVA route, which may allow you to keep control of the company or liquidation in which case the business winds up.
You could also look at a potential phoenix arrangement where the trading style and assets of the old company are bought by a new company under your control.
Facing court action?
Court action is a difficult prospect and the natural response is to pretend it isn’t happening but this is precisely the wrong thing to do.
If your business has received either a notice of action in the County Court or a high court winding up order then you need to speak with an insolvency advisor immediately.
Of course, it may just be that there has been a mistake and you have ample funds to pay off your creditors (in which case you should pay them!) but if this isn’t the case then you really need qualified and experienced advice very quickly indeed.
Acting quickly gives you more options and you’ll definitely feel better for having someone giving you honest and straightforward advice.
Your next step
If you are concerned about your company going into liquidation then you need to get the facts.
Right now you may be somewhere on this road and if you need to talk to someone the please just contact us and we’ll do our best to help at https://www.companyliquidationservices.co.uk