Many business owners have faced challenges over the past year or so due to the COVID-19 pandemic and other issues impacting upon the economy. During this time, many business owners have found themselves with liabilities. In this article, we will look at how directors can minimise any risk arising in this situation.
A director’s main role is to manage the interests of the shareholders, with their overriding duty being to maximise the wealth of the shareholders by promoting the success of the company. In many SME businesses, the directors and the shareholders can be the same people or even person and so these duties will go unsaid – of course you are going to promote the success of your own company!
However, when you cannot pay creditors, this can be an indicator of financial distress. If, as directors, you find yourself in this position, you should start to think about minimising your potential losses as your duty as a director then swings from a focus on the shareholders of the company to the stakeholders as a whole.
When businesses get into difficulty, we often see directors making knee-jerk decisions, agreeing to pay people who shout the loudest. This is usually done without any thought as to who actually needs to be paid, leading to an increased reliance on short-term borrowing as cash to meet the following week’s payment run.
The easiest way to keep abreast of your ongoing financial position is by keeping your management information up to date and monitoring it using a cash flow forecast. Inputting your anticipated sales/income, as well as the expected and/or agreed payments will give you clarity on what needs to be paid and when, whilst also anticipating any potential pinch points. You should include any deferred liabilities within your cashflow forecast to make sure that they are not forgotten about.
A message from Optimum Finance: Remember there are other options to short term borrowing. If you need an injection of cash into your business, invoice finance is often a great choice. Get the funds you need secured against your existing sales ledger and forget about the additional interest you would usually pay on loans and overdrafts. It also grows with your business. The more sales you make, the more funding you could receive to put your cash flow forecast on a more even keel.
Keeping on top of your financial position will help minimise any potential risks, including slipping into insolvency. Many business owners have found that they sleepwalk into an insolvency process as they weren’t fully aware of the extent of their financial problems. There are two main risks for you personally as a director if you subsequently enter insolvency:
Both of these carry personal liabilities for directors, including a requirement for you to make a personal contribution to the loss incurred as a consequence of your actions. How do I mitigate the risks?
There are a number of actions that you can take to mitigate any risks. Maintaining your cash flow forecast is a good start, and documenting your decisions is also a good piece of advice. Taking notes at the time is much easier than trying to remember why you made a certain decision a few months later.
Where you are looking at a cash shortfall, seek advice before taking out extra credit or further borrowings. If you want to dispose of any assets, make sure that those are carried out at arm’s length and for fair value. Obtaining an independent valuation of the assets can assist with this. Finally, you should make sure that everyone is treated equally – do not prefer certain creditors over others, especially those where you might have provided a personal guarantee.
It can be a minefield trying to determine what you should do for the best as a director, especially when you are faced with competing priorities and an increasing number of challenges. Taking a step back and reminding yourself that you need to be acting in such a way as to promote the longer term success of the business is often a good piece of advice, and using something tangible, like a cash flow forecast, to manage your position will help keep you on the right track.
If you feel that your financial situation is starting to become challenging, having someone independent take a look can be a lifesaver. Seeking advice can give you the chance to tackle any issues early and offer your business more options to resolve the challenges you are facing.
At Optimum Finance, we utilise innovative technology to offer a range of flexible funding solutions, which grow alongside your business. Get an instant quote for the amount of funding you could access by entering your annual turnover into our web app. Products include invoice discounting and factoring that can boost your cashflow and give you access to a dedicated credit control team.
Email or call us to speak to our experienced team of experts and find out how invoice finance could help your business. We pride ourselves on getting things done quickly and providing access to cash within 24 hours of approval. We are passionate about finding solutions and delivering to clients’ needs.