Businesses in the UK struggle each year to stay afloat. Many seek help with debt, and insolvency advice.
An analysis of the reasons for business failure from callers to our help line and from those insolvency practitioners we deal with show that the main reasons can be grouped into three categories, namely, financial, management and marketing.
Further Financial reasons for business failure.
The Company bounces the ceiling of its overdraft, leading to bank concerns. It is always a good idea to keep the bank on your side. Do not force the bank to bounce your cheques. Do not use your overdraft unless you need to. A bank in a recession does not need much of an excuse to call in an overdraft, in an attempt to limit losses.
The business is unsure how much it owes and how much it is owed. This is often typical of a business in the state of financial meltdown. Every Director should always be aware of the general state of the finances of the business, as there is a legal obligation to not trade insolvently.
Final demands and writs being received. This is a consequence of poor financial management. If the company had cash it would of course pay its accounts. There is nothing wrong with holding on to cash for as long as possible, whilst ensuring your customers pay you in time, but there will come a point where the account needs paying before proceedings are issued.
Diminished cash balances. These are as a consequence of not collecting debts and paying cash out for items too early of for items not essential for the running of the business.
Bad debts. Try to make sure you know who you are doing business with, and combine this with forceful cash collection.
Poor collection of the debtor book. A poor credit controller can have a very negative impact on a business. It will lead to a lack of cash and potential failure. It may be better in an instance such as this to try to factor the debtor book.
Loss of financial backing. A backer taking out his investment, can lead to a business collapsing if new capital cannot be made good.
Personal extravagance on the part of management. Very often the cause of business failure can be the directors using the business bank account as their own personal bank account. These will need to be repaid, in the event of insolvency.
Borrowings being increased to keep the business afloat. It needs to be taken on board that a limited company is merely a shell and that the business it contains can be transferred from one company to another if required.
Extended lines of credit. The inability to pay for items on time or within the granted limits may eventually lead to legal actions which in turn could lead to a winding up petition.
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