Keith Tully, Managing Partner at Begbies Traynor Group Liverpool, (our latest Knowsley Chamber, Executive Partner) talks us through what we can all be doing to help our business survive and thrive post pandemic support. The balance sheet test and the cash flow test that help spot early signs of distress, so you are in a position to take action before things get out of hand…
It’s not a matter of conjecture that once Covid-19 emergency funding provided by the government phases out, the lifeline for many businesses will be pulled out from under them. Businesses across the country will be bearing the burden of making up for a fraction of lost income, securing new customers and launching new advertising campaigns sensitive to consumer needs in light of the pandemic.
If your business begins to absorb financial pressure as cash from coronavirus emergency support schemes dwindles and if you struggle to keep up with fulfilling liabilities and essential costs, such as rent and utility bills, this is the first red flag of a business in distress. There are two essential tests which can identify if your business is insolvent as by continuing to trade in this state, you fall foul of disregarding creditor interests and therefore, leading the way to an Insolvency Service investigation.
Balance Sheet Test for Insolvency
The balance sheet test for insolvency consists of calculating the value of assets against liabilities to ensure that the debts of the business do not outweigh the value of realisable assets. This includes the likes of stock, petty cash, bank funds, property, equipment, vehicles, and machinery, all of which contribute to the value of the business. Liabilities include debts owed to banking institutions, finance providers, employees, suppliers and trade creditors.
If the balance sheet of the business is favourable towards the assets over the liabilities, this is a sign of a healthy business, however, there are other mitigating factors which can influence this. If the debts of the business outweigh assets, your business may be insolvent.
If your business is insolvent and you continue trading, you run the risk of trading wrongfully which is a serious offence as you are worsening the position of creditors. Due to the coronavirus pandemic, the government enforced a moratorium on wrongful trading provisions which is due to end on 30 September 2020. This is to give viable businesses which are struggling as a direct result of the pandemic some breathing space, enabling them to continue trading without the threat of impending creditor action.
Cash Flow Test for Insolvency
If your business is cash poor, this can result in the inability to fulfil daily expenses, resulting in operations to grind to a halt. If you are unable to pay staff, buy stock and advertise to consumers, you run the risk of driving your business into a state of decline. This situation can easily spiral out of control as, without enough cash flow, the debts of the business are likely to rapidly grow. If your business shows signs of poor cash flow, seek advice from a licensed insolvency practitioner as there are routes which you can take to restructure liabilities into affordable instalments. HMRC have also extended the Time to Pay arrangement scheme during the Covid-19 pandemic which allows you to make staggered payments if you are struggling to fulfil tax liabilities, such as PAYE, Corporation Tax and VAT.
Knowsley Company Distress Levels since Covid-19
The Business Distress Index for Q2, released by Real Business Rescue, using Red Flag Alert data shows that 9,300 businesses born after 2017 showed signs of distress during Q2, this is a 17 per cent increase since the Covid-19 pandemic. It is visible that businesses are being pushed to under capacity since the declaration of the pandemic which continues to result in store closures, staff redundancies and a raft of insolvencies.
By keeping a watchful eye on the position of your business by conducting the balance sheet and cash flow test, you can spot early signs of distress and seek expert help before your business begins deteriorating. By monitoring the financial running of the business, you are visualising the success or failure of the business as without steady cash flow, a business may struggle to fulfil orders and replenish stock.
If you believe that your business is likely to struggle after coronavirus financial support comes to an end from the government, seek specialist advice from a licensed insolvency practitioner. Keith Tully, Managing Partner at Begbies Traynor Group Liverpool, is highly skilled in supporting business in financial distress across Liverpool and Wirral. Begbies Traynor Group is also an Executive Partner with Knowsley Chamber of Commerce, providing insolvency and restructuring advice to company directors during Covid-19.