Battling insolvency: How to use AI and tech tools

Two main factors have contributed to the increase in insolvencies over the past couple of years: the fall-out of the COVID-19 pandemic and rising operating costs. 

As new technologies launch, the potential impact of technology tools on insolvency processes also changes. On one hand, small businesses might benefit from new insights and cash management tactics, using new platforms to analyse and share data quickly.

On the other hand, the use of emerging technology tools could also create challenges, such as relying on AI without considering the importance of human decision making. 

Here, we delve into why insolvencies increased, as well as the potential impact of technology on business resilience and insolvencies – for better and worse. 

COVID-19 pandemic plus rising costs: The causes of increased insolvencies 

“In any developed economy, a certain number of businesses don’t survive each year,” explains Situl Raithatha, partner, Springfields Advisory LLP, an insolvency specialist in Leicester. 

“But, during COVID, businesses that would have failed survived because they received government help.

“Much of this was in the form of bounce back loans, and a lot of insolvencies happened once repayments were due.” 

As those repayments became due, HMRC, which had been lenient on debts during the pandemic, also started collecting.

Further, rising expenses, including interest rates and operating costs, have increased pressure on small businesses, says Craig Parrett, director, Isadore Goldman, an insolvency specialist in London, Portsmouth and Norwich.

“At the same time, potential customers are feeling a squeeze on their finances, and so, are likely to spend less,” says Parrett.

“In addition, the Ukraine conflict and the increase in energy prices have made the situation worse.” 

For better: How tech tools can help businesses avoid insolvency 

Sometimes, stopping an insolvency comes down to speed – and technology can help accelerate action in three ways to boost cash flow quickly, by reducing payment times, identifying trends early and connecting with advisers.

“Technology offered by companies such as Plooto, Xero and Dext can help in reducing the time needed for invoicing,” says Professor Rebecca Parry, Nottingham Law School.  

“[It can also] identify possible problem debtors who may require more targeted enforcement efforts and bill payments.”

Second, businesses that get into hot water can connect with advisers immediately via remote means. 

“It is increasingly important for small businesses to seek advice at the first sign of any financial distress,” says Parrett.

“Technology allows small businesses to have quick and easy connections to professional advisers who will be able to assist if there is a potential concern over viability.” 

In connecting with advisers, businesses can share volumes of data instantly. 

“Even a business without a fully-fledged finance team can give us up-to-date and reliable information,” says Raithatha. 

“For example, a client called me on a Thursday and was ready to throw in the towel. But, he was able to give me very good data on the call, so we were able to establish the issues quickly, and go through them line by line. 

“By Monday, when we had a physical meeting, he’d already done a large amount of cost cutting, and we helped him avoid insolvency.

“In days past, it would have taken weeks, and that might have been too late.”

Even when speed isn’t of the essence, technology – especially AI – might help with reducing the risk of insolvency on a daily basis.

“There are prospects of companies using predictive AI to enable cash flow problems and possible hazards to be identified,” says Professor Parry. 

Raithatha adds, “AI will likely have a major impact going forward because forecasting will become more accurate. 

“We also might get to the stage where software can analyse data in real time and raise red flags, so businesses can respond straight away.” 

For worse: The challenges of adopting technology tools

There are also risks for small businesses using tech tools:

• Acting on erroneous AI insights without human oversight: “[Technology] may be able to present a quantity of very useful data, but not every factor can be considered by the technological processes,” Parrett says. “Human decision making is still essential. Over reliance on technology without considering or understanding what that technology is showing us can cause problems.” 
• Overinvesting to keep up: “There can be pressure on small businesses to invest in technology,” Parrett says. “This obviously comes at a cost and small businesses may overstretch themselves. Money is therefore spent speculatively, perhaps over budget, and it may not always pay off.”
• Becoming overwhelmed by not keeping up: “If you don’t keep up, you might become overwhelmed. There are so many rapid technological changes showing up in each and every area,” Raithatha says. “You have to stay ahead of the game.” 

A delicate balance is required to manage risk on all three fronts

Finally, just as small businesses can use technology tools to examine their financial data, identifying trends in payment data to single out bad debtors early, so can lenders and suppliers. 

“Creditors will be able to employ tools to pursue unpaid debts more effectively, as well as to monitor whether bills remain unpaid,” says Parry. 

This increases the importance of examining and managing cash flow to enable timely payments.