An unprecedented range of business support measures have been made available to UK businesses during the coronavirus pandemic. But as restrictions ease and financial support is withdrawn, many directors will be left to make difficult decisions about the future viability of their business.
Now is the time to start thinking about how the withdrawal of pandemic-related public funding will affect your business. Because the sooner you start to put measures in place, the more options you will have in the future.
Cash flow forecasting
Realistic forecasts should be prepared for best- and worst-case scenarios to predict the business’ financial future. Forecasts should be kept under continued and regular review and updated to reflect any changes.
Late payments can be debilitating to a business’s cash flow and have a direct impact on its viability. A clearly defined credit control procedure based on best practice and past experience is critical.
Act early, be sceptical of excuses for non-payment and always follow through on warnings to demonstrate a persistent and professional credit control strategy. Be tough – stop supplying (particularly if debts are stacking up), charge late payment interest and take legal action.
Forecasting may reveal a shortfall or show capital expenditure is required to adapt operations because of a change in market conditions. If that is the case, then what are the options for how that funding requirement will be met?
Thinking early about the impact of any decisions on your workforce is important. The pandemic has shown that employees are often willing to adapt to change when they understand it’s needed to secure the long-term future of the business.
Businesses also need to think about the effect this will have on the staff that remain, particularly in terms of how the messaging is managed and making sure that they feel their colleagues have been dealt with fairly.
Directors’ duties, disqualification & personal liability
Directors must act in a way that they consider would be most likely to promote the success of the company for the benefit of its members. If the company is insolvent, the directors’ duty is to act in the interests of the company’s creditors.
A breach of these duties is actionable and may result in personal liability for the directors. This could lead to being disqualified from acting as a company director for up to 15 years and being subject to a compensation order.
Whenever there is a threat of insolvency, the directors should seek professional advice as soon as possible.
There are two key tests for insolvency:
- A company cannot meet its payment obligations when they fall due (cash flow test)
- The company’s debts are greater than the value of its assets (balance sheet test)
If directors seek advice from an insolvency professional early enough, there are a number of options available which may make it possible to preserve the business.
Where rescue is not a viable option, the business may be shut down through either creditors’ voluntary liquidation or compulsory liquidation.
Decisions taken by directors should be properly recorded to help mitigate the risk of directors being held personally liable for action taken by the company prior to an insolvency event. Particularly as the conduct of the directors will likely be reviewed by an insolvency officeholder.
It’s important to take appropriate advice (either from a licensed insolvency practitioner, insolvency lawyer or reputable turnaround professional) as early as possible whenever there are signs of financial distress.
We can help
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Early advice is likely to provide more options and could be the difference between the business surviving or not. If you’d like to speak to someone about your business and how we may be able to help, please get in touch. We offer a free, 30-minute consultation with one of our legal specialists – just call Kelly Jordan on 0191 211 7899 or email [email protected]