Liquidation is a word that haunts business owners across the world. The process of liquidating a company results in the shutting down of a company whilst also selling off assets to pay off debts.
Liquidation should be a last resort, but if you don’t give careful consideration to your business’s finances, it may be the only option on the table. This article will explore strategies that can prevent your company from reaching the dreaded liquidation stage.
Cash Flow Management
The best way to avoid liquidation is to consider cash flow from day one. There’s an old saying in business that revenue is vanity, profit is sanity, but cash is king. Regardless of how much money a company appears to be making, this will all go to waste without a healthy cash flow.
Cash flow refers to the amount of money going in and out of a business at a certain point. If there is more cash going into a business than there is going out of a business, it will result in positive cash flow. Cash flow problems begin when there is more money going out of a business than there is coming in.
It’s quite possible for a business to be in profit while simultaneously suffering from cash flow problems. Business owners who focus solely on profit (or even worse, revenue) run the risk of running into cash flow problems.
It’s important to carry out regular cash forecasts to identify any future periods for concern before they arise. Often when cash flow becomes an issue, it’s too late. Once you have identified any future cash flow problems, you may want to negotiate more favourable payment terms with suppliers or take extra steps to reduce expenses.
Build Relationships with Creditors
As mentioned above, negotiating more favourable payment terms is one of the best strategies to avoid cash flow problems which could subsequently lead to liquidation further down the line. That’s why it’s important to build healthy relationships with creditors.
If you can build up a good relationship with suppliers, you may experience more leniency when it comes to payment. Having the option to delay payment by a few days or weeks could make a significant positive impact on your cash flow. While it may sound dramatic, this could make the difference between your business surviving or not in the long term.
The best way to build a lasting relationship with creditors is by being respectful from the moment you start working with them. Always be transparent about your financial situation and try to give them a heads up if you think your business may run into financial difficulties at some point.
Consider a CVA (Company Voluntary Arrangement)
While the previous two strategies can help you avoid running into money problems, it’s sometimes impossible to avoid running into cash flow problems. That’s why it is important to understand how to deal with serious financial difficulties after they’ve arisen and not just before.
A CVA is a company voluntary arrangement that sees companies and creditors agree on a fixed period of time for debt to be paid off. Sometimes, the two parties will also agree on a reduction in the amount of debt that needs to be repaid to ensure the creditors receive some form of payment.
A CVA is similar to a debt management plan (DMP), although these are more common with individual debt cases as opposed to business cases. A DMP for businesses will involve stricter confidentiality and legal processes, and the full amount will need to be repaid.
Both a CVA and a DMP can serve as ways to avoid liquidation which can give your business the necessary time to get back on track from a financial perspective. The downside of letting your financial struggles get to this stage is that it could negatively impact creditors’ desire to work with you in the future.
Administration as a Rescue Tool
Many think administration and liquidation are closely aligned, but the main difference is that administration is designed to save a business while liquidation involves the end of a business’s life.
An administration process involves restructuring a company’s debts and developing a plan that works for the business and the creditors. The main downside of entering administration is that it involves an external administrator joining the company for a short period.
The obvious benefit is that administration can act as a rescue tool before building your business back up.
In summary, the most effective way to avoid liquidation is to consider your business’s financial situation before problems arise. If liquidation is being discussed, it may be too late to save your business although administration may still be a better option at this point.
Even if your business is not experiencing financial issues, pay close attention to your cash flow and carry out regular forecasts. You can also work with business consultants if need be. If you need help getting started with cash flow forecasts, there are many cash flow templates online.
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