It's tough out there

"Do not fear the winds of adversity. Remember: A kite rises against the wind rather than with it" (unknown)

"When written in Chinese, the word crisis is composed to two characters. One represents danger, and the other represents opportunity." (John F Kennedy)

"Depression loses its power when fresh vision pierces the darkness" (Peter Sinclair)

Quite frankly, times have been better. The current recession isn't helping, of course. Cash flow has become very tight, intolerably tight. You're finding it difficult to get customers to pay up and the bigger ones, those with a fair deal of bargaining power, are abusing their size and making you wait even longer for payment. Wages need to be paid, the tax bill for last year, a year in which you actually managed to make a profit and incur a tax liability (doesn't it seem a long time ago now?) is almost due. Suppliers are threatening to put you 'on stop' and the bank manager is starting to get a little concerned about your overdraft limit. And there is no way, you think, that you're going to get your hands on a loan or a bigger overdraft facility in these dark and gloomy times.

Well, firstly, you're not alone. Businesses everywhere are experiencing unprecedented economic and financial difficulties. So don't automatically blame yourself for being in this situation. But, at the same time, you need to be careful. If your business is technically insolvent (and many are at the moment, even though the business owners don't themselves realise it until I point it out to them) then you could run into trouble should you continue to trade. Even as a limited liability company, the directors can be made personally liable for the company's debts if they continue to trade whilst insolvent. Once a company becomes insolvent, the directors' primary responsibility becomes the protection of creditors, not shareholders. There are two definitions of insolvency in relation to a limited company; a company is insolvent either when its liabilities become bigger than its assets, or when it becomes unable to pay its liabilities as they become due. If you operate as a company and fall under either of these definitions, call me.

Insolvency is not necessarily the end of the road. It's not something to be ashamed of, and it's certainly not something you can brush under the carpet or close your eyes to. You have to confront it, head on, and take the right advice. Businesses can continue to trade through insolvency, so long as they take the right steps, and this means taking the right advice. As well as ensuring that you're doing things correctly from a legal standpoint, how are you going to make sure that you don't get into the same situation again in the future? How can you re-engineer your business model to become less exposed to economic downturns, maybe even recession-proof?

Call David now on 0161 266 1036 or email him at david@davidelliottassociates.co.uk 

Read David's articles published in Student Accountant on Corporate Decline and Corporate Recovery.