Staying solvent is an integral part of staying in business. But in an ever-changing and volatile economy, this is often easier said than done.
At Irwin Insolvency, we know just how difficult it can be staying solvent, and we offer a range of solvency planning solutions that can help your company to stay in competition – and to thrive.
Irwin Insolvency undertakes a full range of support services with regard to financial and managerial planning. Recent years have seen a flood of new rules and regulations affecting the business world. We have considerable experience in advising on a wide range of business and financial matters, and offer many specialist services that are tailor-made to suit individual businesses seeking best advice.
In this unstable world, it’s always best to seek financial advice before your company begins to struggle with debts or cash-flow problems. We offer expert advice that can keep you safely solvent, long before the prospect of insolvency becomes a reality.
What Is Solvency?
Solvency, in the simplest instance, is the term used to denote if a company can pay its long-term debts. This is an incredibly important measure of financial stability within a company, because it’s essentially a measure of whether a business can continue to do business. This is a measure of long-term assets against debts and financial payments. To be solvent, those assets need to outweigh the long-term debts and financial obligations.
Importantly, solvency is a long-term measure of financial stability – as opposed to liquidity – and this is just another reason why this is a measure that companies have to take seriously. Failure to do so can have serious consequences for long-term business prospects.
A company that loses its solvency becomes insolvent, a financial situation that can often lead to bankruptcy. This isn’t necessarily always the case. At Irwin Insolvency, we’ve brought many companies across many different industries back into business, despite entering insolvency. But, you shouldn’t let your company slide that far in the first instance, and we offer the expertise that can keep you solvent and away from the dangers of bankruptcy.
Optimal Solvency Ratio
The simplest way to assess whether or not your company is solvent is to conduct a solvency ratio test. A solvency ratio test is an important financial tool that can be used by accountants, directors and insolvency practitioners to assess the long-term viability of a business, based on its ratio of income to liabilities.
A basic solvency ratio looks like the following:
Net business income / business liabilities = solvency ratio
Ratio equations can take into account other factors, such as expenses, too. Overall, the higher the score, the more solvent a business is considered to be. The lower the score, the less solvent the business is and the less likely it is to be able to pay its debts.
For the ratio to be an accurate measurement of solvency, it’s imperative that business directors keep accurate and updated books and details of accounts, payments, assets, debts, liabilities and more.
Banks and insurance brokers often use a company’s solvency ratio as a measure of risk. The higher the number, the more solvent a business is and the less risk the bank is likely to take on when approving loans. The lower the number, the more liabilities the business already has and the less solvent it’s likely to be in the future. This entails more risk for the bank and can lead to a business struggling to have large loans approved, or the need for directors to offer personal guarantees.
As you can see, keeping a business solvent is an important step towards long-term business survival. Solvent businesses often have access to more capital, more investment and larger bank loans when necessary. Businesses struggling to stay solvent, on the other hand, are always a risky proposition for investors and banks.
To improve a solvency ratio, businesses need to improve their long-term viability and ability to pay off their debts. This involves not only avoiding insolvency but implementing business strategies aimed at long-term growth, lowering expenses and overheads to lower debts, and increasing turnover and profits.
What Causes Insolvency?
Insolvency, or the act of a company losing its solvency, can be caused by a number of circumstances, many of which are entirely controllable and some of which are uncontrollable.
Losing solvency can come down to factors such as economic downturn or unstable market conditions caused by political events such as Brexit. Insolvency can also be caused by cash-flow problems, by a failure to meet competition, or by the loss of clients and customers. There are a myriad number of factors, and it can be difficult identifying which are the most important for your company’s solvency.
The factors that you can control, you need to control, and that’s where Irwin Insolvency can help you with our expert advice and solvency planning solutions. A successful business ultimately comes down to good planning and good advice, and we provide the best of both.
Steps to Take for the Future
Regular and accurate management information will provide business managers with timely warning should there be a decline in a company’s financial performance. Once problems have been identified, business managers should take appropriate action without delay.
This could, for example, include the provision of a renewed marketing effort or perhaps a more basic review of the business, its products and market sector.
How to Plan for Long-Term Solvency
Planning for solvency isn’t a short-term endeavour, but rather a long-term approach, as solvency ratios are based on both long-term liabilities and short-term liabilities. Business directors need to strategize and create contingency plans for future growth and profitability.
Irwin Insolvency offers a range of effective consultation services that assist struggling businesses with planning for long-term solvency:
- Advice to directors
- Business growth advice
- Corporate reconstruction
The level of advice and assistance that a business requires in order to plan for solvency varies greatly between companies, but Irwin Insolvency is able to offer a full service consultation.
Advice to Directors
Business directors have both a moral and legal responsibility to provide a ‘duty of care’ to their business or company. This means that directors need to act in the best interests of the business, its shareholders and its creditors when making decisions that affect the company.
In order to make the best possible decisions, business directors can seek out impartial and independent advice, such as the consultations provided by Irwin Insolvency.
Directors have important responsibilities, and they need to be informed of all their options while also having access to up-to-date and accurate information if they wish to plan for long-term solvency.
Should events unfold that lead to financial distress or insolvency, then business directors also need to be aware of their personal liabilities in terms of business debt and the penalties or disqualifications they could face should the business be liquidated.
With ever-changing rules and regulations and the economy facing an uncertain time, independent business advice from knowledgeable experts has never been so important.
Business Growth Advice
In order to remain solvent, businesses need to plan specifically for long-term business growth. Without growth, the business stagnates and can eventually become insolvent.
Businesses should seek out independent business growth advice, to open up new and innovative ways to expand. But growth isn’t the same process for every company. For some, it can involve building new products, for others, growth is expansion into new markets.
For businesses, growth can often mean expanding in the following ways:
- Growing profits
- Growing turnover
- Growing sales
- Growing the number of employees or departments
- Growing the number of outlets or offices
- Increasing the market share of the business
- Expanding into new markets or demographics
- Creating new products, offering new services, and finding new avenues for revenue
- Developing a sustainable business, including infrastructure, revenue or ethos
Business growth doesn’t just involve physically expanding the business, hiring more employees and growing profits however, it also means investing in the future. It takes investment in training, in new technology and new business trends to stay on top, and to remain solvent in the long term.
As part of long-term solvency planning, businesses often need to consider corporate reconstruction. While reconstruction is often seen as a last resort in the face of financial problems, it can also be used as a way to streamline the business or create a more tax-efficient organisation.
Corporate reconstruction can involve restructuring of the hierarchy, streamlining of overheads, or consolidation of the business as a whole to ensure future solvency. Independent advice can help to establish the best way to restructure if it will result in long-term stability for the business and its employees.
When Does a Business Need to Start Planning for Solvency?
When does a business need to start planning for solvency? This is the most common question we receive. The answer however is actually rather simple.
That’s because it could be said that the aim of business, ultimately, is to generate profit and stay solvent. In this respect, there’s no time when a business should not be planning for solvency.
If you’re looking to improve your solvency ratio, to expand the business or to improve your profitability, then you are planning for solvency.
If your business has fallen into insolvency, then other means need to be taken to save the business in the short term. If insolvency measures are successful, then the business can again begin solvency planning once it has become sustainable and viable.
How to Avoid Insolvency in the Short Term
Financial positions should be constantly reviewed in order to ensure solvency and prosperity. If the position becomes serious, then the intervention of an objective third party such as an insolvency practitioner is essential to enable the business to reach an informal arrangement with its creditors in an attempt to:
- Resolve difficulties
- Implement formal insolvency procedures.
We can provide assistance and advice on a number of proactive measures, as well as general business advice.
Irwin Insolvency can implement effective insolvency procedures aimed at saving your business or winding it down in the best way possible. These include the following measures:
- Company Voluntary Arrangement (CVA)
Business directors surrender their decision-making powers to an appointed administrator, who essentially takes charge of the company and attempts a business turnaround. Administrators come to agreements with creditors, liaise with suppliers and, where needed, restructure the company or sell assets to raise funds.
Administration can see harsh decisions being made, but ultimately it can lead to streamlining, repaying of debts to creditors, and survival for future growth and profitability.
Company Voluntary Arrangement (CVA)
Company voluntary arrangements are voluntary agreements made between a business and its creditors. A CVA allows a business valuable breathing space, as it ensures that creditors must liaise through an insolvency practitioner and can no longer aggressively chase debts.
A CVA will lay down a structured repayment plan, ensuring that a business can repay its debts over a longer period of time, often with less interest or overpayment charges. Directors remain in control of their business throughout the CVA time-period, which often lasts for at least 12 months.
Liquidation is only ever a last and final measure, but in some cases, when solvency planning is no longer viable and the business cannot be saved, it’s inevitable.
In this situation, there are multiple avenues a business can take to ensure the smoothest and fairest liquidation possible.
Businesses are advised to take voluntary liquidation first, where they retain some measure of control over how assets are sold off to raise money to pay creditors. If a business refuses to recognise that liquidation is the only outcome, then creditors can go through the courts to instigate a compulsory liquidation. This is only ever taken as a last resort, however, after the creditors and an insolvency practitioner have exhausted all other options.
How Can Irwin Insolvency Help Your Business Plan for Solvency?
Irwin Insolvency offers a wide range of expert consultancy services focused on solvency planning and long-term business growth and stability. Our knowledgeable and experienced team of financial advisors provide business growth advice, advice to business directors and recommendations for corporate reconstruction.
We also provide a range of services in the short term, should your business be facing insolvency. Our team can recommend and implement insolvency measures, including CVAs and administration measures, aimed at saving businesses. We can also wind down companies that have no option other than insolvency.
The process of solvency planning begins with a quick phone consultation or email, followed by an in-depth chat where our team establishes your goals and requirements. Our services are highly personal and personalised to your business needs. We don’t offer blanket advice or consultation, because we know that every business is different. Our ultimate goal is to work with you to ensure that your business can remain solvent and grow in the long-term.
Irwin Insolvency has over 25 years’ experience working with businesses and corporations in the United Kingdom. We’ve worked with companies large and small, and from a range of industries, be it manufacturing or retail.
We provide a personalised service that aims to keep your company solvent in a volatile economic climate. Contact Irwin Insolvency today to discuss your insolvency issues with a member of our experienced and knowledgeable team.
Get in Touch
With over 25 years of experience, helping people just like you, we are committed to providing you with all the help and advice you need during these challenging times. Simply give us a call, drop us an email or fill in the form to find out how we can help you.
Irwin & Company,
West Midlands B72 1TU
0800 254 5122
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