As the business owner, when your company is under-performing or taking a downturn you have to try everything possible to ensure that you bring it back in the right direction. Your best shot may be looking for business rescue services. But before that, how do you know that your company is insolvent and requires immediate help? The following four are the indications:
- The cash flow test
- The balance sheet test
- An unsatisfied judgment
- An outstanding statutory demand
The most essential out of these four is the cash flow test. This test looks at whether a business can pay its debts as and when they fall due. Late payment of creditors shows that a business is in critical condition as far as cash flow issues are concerned. The main reason for most business failure is running out of cash and that can happen due to several reasons:
- Bank froze the business account
- Sales ledger problems
- Business is restricted to draw down funds due to, for example, lack of available credit
If the relationship of the business and bank is under pressure, then the rescue services will examine the causes and effects. Generally, banks would prefer a company not to be closed down as they only begin to get strict if a business:
- Consistently tests its overdraft limit
- The business cheques can’t be honored
- The business fails to communicate
- Business doesn’t offer sensible financial as requested
A rescue services provider will be able to assess this objectively because mostly the directors inject their personal funds without advice. Additionally, if the sales ledger system has not been updated accurately or there are problems with suppliers concerning invoices, then the system requires being looked at fully and more drastic measures put in place.
When it comes to a cash outflow, two major issues can come up and they are:
- Inability to pay outstanding debts
- Inability to pay future debts or bills
Prioritizing payments is a must in this situation. It’s also important if a business has decided it’s insolvent because it has to act in the best interests of its creditors and requires clear principles to make payments and avoid personal liability. In these cases, unless a business is quite familiar with this kind of situation, it’s important to seek the assistance of a professional insolvency practitioner or restructuring adviser.
Additionally, employees very quickly realize that there are issues in the company. When that happens, productivity is likely to go down as they start worrying about the security of their job, which brings distraction and makes them less focused on performing well on their tasks. Relying on big contracts to solve the issues is a bad idea, even when the CEO trust that the situation will be short-lived.
Mostly, the cash flow issues are an indication of a more deep-rooted problem and even if the short-term issues come to an end, the structural weaknesses in the company will likely cause the situation to reappear if nothing is done to prevent it. A restructuring professional will come with several strategies to help.
When To Call in Rescue Services
When the management admits that it needs assistance and call in a rescue services provider, they will come in and be part of the team and their main goal will be helping the business survive and grow. The adviser will want to first look thoroughly at the business to know whether a part or all of it is viable before offering any advice on a turnaround strategy.
However, in case such assistance has been a call in, the staff too will be reassured and everyone will be more likely to work with raised focus being part of the entire team, including the management, business rescue services providers, and workforce. All of them will be in one common goal to save the company’s future.