Insolvency is probably the last thing considered by entrepreneurs and new business owners. At the beginning of the company’s journey, everyone hopes for it to flourish and succeed, while naturally expecting there may be some challenges on the way.
Most companies would not anticipate failing, going into administration and losing their business. However, looking at the recent demise of some top UK retailers, insolvency may affect anyone.
Some companies go so far down the insolvency line that there’s often no turning back. However, many don’t seek advice when the early distress signs appear, often as they are reluctant to admit or fail to see that the signs are there.
We could equally look at this from a different perspective – could business recovery and insolvency practices be doing more to save struggling businesses? After all, having the extra time makes all the difference, it determines why some businesses may fail and why some survive and prosper.
Why companies get in trouble
There are a lot of factors that may lead to financial struggles such as the lack of an appropriate management information system, wrong key success metric or an unfavourable creditor/debtor days ratio that in turn leads to cashflow problems. Sometimes companies bite off more than they can chew – overtrading affects the cash flow and often puts the business in a bad short-term position, that might transform into long term financial struggle.
First signs of distress and reluctance of admitting failure
Should no action be taken towards understanding the underlying problems that the company is facing then it can be a very slippery slope that can lead towards the insolvency zone.
First signs of distress include cashflow problems, extended debtor or creditor days, increasing staff turnover, declining staff morale, high interest payments and defaulting on bills.
It’s often difficult to detect them. Some individuals within these organisations might sense them, but their voice is not necessarily heard or doesn’t want to be heard higher up the ladder. This is one of the reasons why businesses may fail. In many cases owners or management don’t want to admit, or fail to see, issues. They may try to solve the matters on their own, without consulting the specialists.
Business recovery and insolvency practices – taking a proactive approach
Insolvency has negative connotations. Owners, directors and managers may associate it with failure. They may not appreciate that employing an insolvency practitioner can save their business, providing that they are consulted in time.
It could therefore be argued that business recovery and insolvency practices should be more proactive in identifying and approaching companies that need help. Early identification of companies in distress or with the potential of distress could offer those struggling businesses more options, rather than starting a formal insolvency procedure straight away.
How can business recovery and insolvency practices identify struggling companies?
The answer would be an ‘early warning’ alert system designed specifically for business recovery and insolvency companies.
There are a number of products and suppliers on the market but the key features to look out for are:
A supplier who can provide extensive live company information, which can be used to identify and target businesses in early distress stages and provide daily updates on those companies.
A system that can notify you of key changes such as a defined negative change in credit score, CCJ filings, late filings of accounts, filings of petitions and winding up orders and potentially adverse director activity.
The capability to tailor results to specific business sectors or postal codes, making it easier for business recovery and insolvency practices to approach companies in early financial distress, before it becomes critical.
Benefits for struggling companies and insolvency/corporate recovery businesses
There are some clear benefits for both parties. By taking a proactive approach, business recovery and insolvency practices have an opportunity to not only gain new clients and drive revenue for their business, but also obtain a reputation of a business who helps others and makes a positive impact to the local or national economy.
In terms of companies in the initial stages of financial struggles - the earlier they speak to the experts, the more chance they have to take a turn for the better.
Author:
Steve Blacker
Associate Director, Business Information
steve.blacker@vistra.com