Business insolvency numbers has hit record high in February 2012. According to the Australian Securities and Investments Commission or ASIC, 1,123 businesses entered administration in February compared to 518 businesses in administration last January 2012. Furthermore, 449 businesses had to undergo court wind-ups in February 2012 compared to 79 businesses the previous month.
Insolvency is a difficult situation for any business. Insolvency is generally described as a company’s inability to pay its debts and other liabilities. An insolvent business has insufficient funds to pay its creditors despite liquidation through selling all assets and is unable to generate new funds through capital markets. Insolvency is caused by many factors including an ineffective business model, capital market values, competing technologies and poor cash flow management.
If your business is facing insolvency, it is crucial to take immediate action if the business is to survive. Directors must be wary of trading while insolvent as they will be held liable for insolvent trading in which civil or criminal penalties may apply. In this article, we provide some guidelines on how you can save your business from insolvency and continue operating legally.
Manage your cash flow
Cash flow management can be especially difficult when the business is already in financial distress. However, proper cash flow management is crucial if you are to recover from insolvency. To drive your cash flow, follow up on late payments of your customers and implement a shorter credit term for future contracts. Implement penalties for late payments to put some pressure on your customers to pay on time. It can also help to delegate a staff member to focus on follow-up and collection of payments.
In managing your cash flow, it is also important to manage the competing priorities for payment. Priority for payments will be payroll, suppliers as you need them to keep your business operating, then followed by ATO payment plan and others creditor’s payment plans.
Consider business restructuring
A business restructure is when a company reorganises its ownership, legal structure, assets and debts, business model, cost structure and ways of doing business. A restructure can be a positive way to respond to insolvency as it allows the business to generate new revenue, making the new company more effective and efficient while keeping the core business intact.
If you see business restructuring as a viable means to recover from insolvency, discuss your requirements with a business turnaround specialist or insolvency specialist as they can help you establish restructuring strategies to meet target operating profits and target cost structure. They can also assist in the implementation and monitoring of the agreed business restructuring strategies.
Seek professional help
Insolvency does not always lead to bankruptcy as some businesses are able to recover and successfully increase their profitability. However, this is not always the case for many businesses facing insolvency as seen in the record number of 449 businesses winding up in February 2012. If your business is at risk of insolvency, do not hesitate to get the help of a professional business turnaround specialist as they can give you the assistance you need to save your business. A turnaround specialist is an expert in negotiating with debtors, debt and cash flow management, business restructuring and business recovery and can help you avoid the pitfalls that other insolvent businesses has fallen into.