by Richard Ludlow, partner at Thackray Williams
The first budget by a Labour chancellor in well over a decade was billed as a budget for growth.
However, many insolvency practitioners anticipate an increase in companies failing in 2025 as a result of the substantially increased business costs contained in Rachel Reeves’s October announcements.
Pre-emptive support and action can often help save a failing business, but unfortunately many directors take an ostrich approach until it is too late. This is where finance professionals play an important role in supporting business leaders to help their companies succeed when the going gets tough.
The ostrich approach: a common pitfall
Insolvencies and the proportion of businesses failing have unfortunately been rising since 2022. In part, this is because many entrepreneurs and SME directors tend to take an ‘ostrich approach’ when faced with potential business failure.
This may stem from a reluctance to accept that their business could go under, leading them to deliberately ignore warning signs in the hope that everything will be OK.
Failing to take effective action can have severe consequences. Insolvency becomes extremely likely if positive steps are not taken when there are concerns about the business’s financial position.
In the event of insolvency, liquidators or administrators have a statutory obligation to investigate the business’s failure and the directors’ roles. This can lead to potential claims to recover monies for creditors, and may result in the Insolvency Service considering director disqualification proceedings.
The benefits of early intervention
Time is of the essence when a business is in financial difficulty; early intervention can significantly increase the chances of staving off business failure. While it may not be possible to rescue the whole business, brave and honest examination of the finances, challenges and opportunities can help refocus on the more profitable elements – potentially jettisoning those bits of the business that have been carried by the more successful areas – to ensure that at least some of it survives in a recognisable form.
It may not be the same business, but it may well be a leaner, more focused and more profitable enterprise.
Spotting the early warning signs
With many directors turning a blind eye to the early warning signs, professional advisers – such as accountants and commercial solicitors – have a key role to play in flagging them up to their clients. And it is in our interests to do so; our own success depends upon our clients’ continued success.
Our role may extend beyond our own area of expertise. There may be times when it is beneficial to introduce a client to an insolvency practitioner to help examine the opportunities to save at least some of the business.
While the word ‘insolvency’ may be a red flag to many directors, insolvency practitioners have a vital, proactive role to play in saving businesses; positioning their expertise so that clients do not just see them as vultures coming in to pick at a carcass can be the difference between make or break.
Moreover, if the business does still unfortunately fail, being able to demonstrate securing early expert advice can be an important defence against potential director disqualification.
Crucial conversations
It is vital to initiate conversations as soon as there is any indication of financial struggle. True, these conversations can be difficult to have, especially with clients who would rather stick their fingers in their ears than hear hash truths – but we do them a disservice if we do not rise to the challenge. These discussions should cover restructuring strategies, negotiations with creditors, and the suitability of insolvency procedures, such as liquidation or administration.
It is also important to encourage directors to maintain open communication with employees, customers, and creditors to build trust and potentially achieve better outcomes.
Building for continued business success
The early indicators will vary, of course, depending on the business, but common signs include decreasing cash reserves, difficulties in paying creditors, heavy reliance on debt financing, worsening credit terms from key suppliers or their refusal to extend credit terms.
Different distress signals will require different solutions. As we work with our clients to ensure an effective cash flow to be able to deal with short- and medium-term obligations, cost reduction wherever possible needs to be high up on the agenda. Accountants and lawyers can have a key role to play in renegotiating contracts and payment terms to improve cash flow to keep our clients’ businesses afloat.
While the forecasts from insolvency experts for 2025 are gloomy, businesses can significantly improve their chances of navigating financial difficulties and avoiding insolvency by pulling their heads out of the sand, looking the warning signs squarely in the eye and taking effective action to improve cash flow and profitability.
Accountants, commercial lawyers and insolvency practitioners have a key role in supporting directors to face challenges head on. My prediction is that 2025 is going to be a busy year for us – but if we play our part, we can help our clients emerge leaner and stronger.
