Tips When Facing Up To Insolvency

On Friday the Insolvency Service will release figures showing the number of insolvencies in the UK in the first three months of 2010.

The figures are expected to show a reduction in the number of corporate insolvencies.

The position with personal insolvencies or bankruptcies, which include debt relief orders introduced this time last year, is expected to remain stable or at least show a reduced rate of increase.

Now that the recession is technically at an end, can we assume the worst is over?

Probably not.

Insolvency time lag

A report from business recovery firm Begbies Traynor revealed that the number of businesses experiencing significant financial problems had jumped by 20,074, or 14%, to 161,601 in the first three months of this year.

It is also thought that there are one million individuals who have not yet faced up to their debts, or are struggling with payments helped by benign interest rates.

And it is estimated that there are a further 500,000 people who are negotiating with their creditors, but who do not form part of the formal insolvency statistics.

Insolvency trade body R3 has warned of an "insolvency time lag".

Figures from the two previous recessions in the 1980s and 1990s show that the peak in both personal and corporate insolvencies occurred after the return to growth.

In the 1990s, the peak in company liquidations was a year and a quarter after the return to growth, and for personal insolvencies, it was a year and a half after.

The lag is due to the time it takes before creditors begin to lend at pre-recession levels or before employment and spending pick up.

Company directors should be mindful that the worst may not be over and that they will have to tackle liquidity problems head-on, particularly if the credit conditions do not ease over the coming months.

Companies

There are four key areas that businesses need to address in order to survive the recovery.

Firstly, directors should avoid focusing on profit and loss as it is not usually a lack of profitability that causes businesses to fail - it is a lack of cash.

The reason why most businesses fail is that they simply cannot pay their bills; they become cashflow insolvent.

Adequate management systems need to be in place, and directors must act on the warning signs before they become problems.

Secondly, a view should be taken on customers' likelihood to default as such an event can be crippling.

Consider Companies House searches, checking with a credit reference agency, and obtaining credit insurance.

Clear credit limits should be set for every customer, to limit potential losses.

Thirdly, remember, "turnover is vanity and profit is sanity".

New business must be profitable and without significant risks and unfavorable terms for payment.

It can be very tempting to bend over backward for a shiny new contract with a large corporate client, but they often want longer payment terms so it could be months before you get paid and the margins will be lower.

Read Full Article Here: Tips When Facing Up To Insolvency

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