9 ways to avoid insolvency

The government’s monthly insolvency statistics show an 18% year on year increase in the number of registered company insolvencies, with 2,315 in October 2023 compared to 1,954 in October 2022.

For Q3 2023 as a whole, the four most impacted sectors were construction, hospitality, retail and business services. Construction and hospitality were also in the three industries with the most insolvencies for the year to the end of Q3 2023.

“Our analysis, which is in line with today’s release from the Insolvency Service, shows there was a 10% increase in insolvencies in Q3 2023 compared to the same quarter last year, with the number of insolvencies at levels not seen since the financial crisis in 2009,” David Kelly, Head of Insolvency at PwC, said.

Kelly also pointed out that 99% of all creditors’ voluntary liquidations and 98% of compulsory liquidations affected businesses with turnover under £1 million.

“While larger companies are not immune to the current pressures, we expect smaller businesses to continue to be the most adversely affected in Q4 and throughout 2024,” he said.

“Interestingly, there has been approximately a 35% increase in compulsory liquidations in Q3 2023 compared to Q3 2022, and they now make up over 12% of insolvencies compared to 9% last year. This demonstrates the tougher stance creditors are taking and reflects a more challenging market.”

While it is difficult to point to any one factor driving the recent rise in insolvencies, a catch up of cases that were halted when the courts were closed during the pandemic, the end of government measures to protect businesses during the pandemic, increased operating costs and trends in consumer spending, including those related to the cost-of-living crisis, will be having an impact.

9 ways to help protect a business from insolvency

There are several ways you can advise a business to protect itself.

1. Cashflow forecasting is key  – If a business does foresee cash difficulties it should act as soon as possible. A rolling 13-week cashflow forecasting model can help to foresee and understand a cash shortage. This allows time to try to resolve the shortfall and ensure that directors act within the rules and legislation, and don’t increase liabilities it can’t meet. 
2. Collect promptly from debtors and ensure that all debtors are chased, particularly those overdue. The business can consider offering a discount for early payment of invoices. 
3. Renegotiate new payment terms with creditors to delay payments, but any business that does this must ensure it can meet the new agreed payment terms. 
4. Review the overhead cost base, assess which costs aren't critical to the business and reduce these as quickly as possible. 
5. Review staffing levels to see if staff costs can be reduced, but be aware that notice periods and redundancies may be payable so ensure these, if applicable, are built into the cashflow forecast. 
6. Consider selling or raising finance against equipment.
7. Consider borrowing, whether a bank overdraft, bank loan or borrowing against the debtor book using invoice financing. 
8. Negotiate with HMRC to allow more time to pay PAYE/NI or VAT liabilities.
9. Negotiate with their landlord – the landlord would be impacted if the business was insolvent, and may be willing to negotiate a short-term rent reduction to keep their property tenanted.   

If you genuinely believe your client’s business is in danger of insolvency, always seek impartial advice from a recognised insolvency professional as they may have other ideas or solutions to help the business survive.