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In a year that closed with record insolvencies, 2023 saw more than 25,000 companies cease trading, the highest annual number since 1993. November alone witnessed a total of 2,466 insolvencies, 21% higher than 12 months before. This alarming trend of business failures not only highlights the importance of effective cash flow management but presents a golden marketing opportunity for accountants to help SMEs avert bankruptcy, as Jonathan Barber, Executive Director – UK of the Institute of Financial Accountants (IFA), explains.
In the dynamic world of business, ensuring financial health is of utmost importance. Yet estimates place the number of businesses that have a cashflow forecast between 25-30% while surveys of accountants highlight diminishing demand for forecasting services. It is here that there lies a golden opportunity for accountants to become the critical friend delivering insights gained by quality forecasting at the same time presenting opportunity to avoid business demise.
Perfect storm
The record number of insolvencies has been fuelled by an accumulation of economic factors as businesses have faced a plethora of challenges over the past few years. Higher inflation, staff shortages, escalating energy prices and supply chain disruption have all been triggered by global events, at a time when governments ended their COVID support. A recent report cites more than 47,000 UK businesses are on the brink of collapse with a 25% jump in firms facing ‘critical’ financial distress. The construction and property sectors account for a third of all businesses facing critical financial distress, with 18 of the 22 sectors covered by the report recording double-digit percentage growth in the number of firms whose finances have reached critical condition.
Cash flow and insolvency support
Financial distress and insolvency are recurrent risks for small businesses, which can either develop over medium to long-term periods or be the result of sudden unexpected crises. Financial distress is often a pre-cursor to insolvency, with many SMEs facing potential insolvency risks at some point in their lifecycle. Yet while accounting professionals are specialised in efficiently managing cash flow, it is often an undersold service in their growing, multifaceted role in safeguarding the financial health of businesses.
In addition, accountants possess a unique ability to assist clients in navigating through business distress and recovery, thus bolstering their advisory services further. By recognising the warning signs that indicate a company is heading towards financial difficulty, such as cash flow issues, declining turnover, and increasing debt, they can play a crucial role in guiding their clients to engage with the insolvency profession at an early stage, allowing them to address and resolve their financial challenges. This is based in part on the usefulness of real time accounting and banking information to develop algorithms to predict cash flow difficulties and pinch points.
Encouraging clients to seek assistance from insolvency professionals as soon as they notice signs of financial distress provides them with a wider range of options to rectify the issues. It also grants them more time to make informed decisions about the future of their business, potentially leading to a more favourable outcome rather than waiting until the problem escalates.
Furthermore, accountants have an important responsibility in reassuring their clients that consulting with an insolvency practitioner does not automatically result in a formal insolvency appointment. Insolvency practitioners always strive to support the rescue and recovery of a business whenever possible.
Adding value
Amid the ongoing challenges of the current economic landscape, accountants are there as a critical friend, delivering specialised, relevant, and potentially business-saving advice. This advice extends to other areas which fall outside an accountant’s remit, but in their advisory role, they can point clients towards a number of resources available which UK SMEs can tap into to help them navigate through tough times:
- Further expert help
Local Enterprise Partnerships (LEPs) are actively supporting local businesses in addressing the current challenges related to the cost of living. Through their extensive network of 38 Growth Hubs, they have successfully assisted over two million businesses in the previous year.
Growth Hubs collaborate with both public and private sector partners, such as the British Chambers of Commerce (BCC), the Federation of Small Businesses (FSB), universities, Enterprise Zones, and banks. This collaboration ensures that client businesses are connected to the most suitable assistance that caters to their specific needs.
- Debt management
The Money Advice Trust, a national charity, operates Business Debtline, a free debt advice service specifically designed for small business owners and self-employed individuals. In addition, the British Business Bank provides a comprehensive guide to sources of advice and support for business owners facing debt-related challenges.
In the event that an SME client finds it difficult to meet the repayments on a business loan or mortgage, it is crucial they promptly communicate with their bank or lender. Taking immediate action, such as restructuring or refinancing the loan, or exploring alternative financing options like invoice finance, may help settle their debts and sustain the company’s operations.
- Energy bills
On 1 April 2023, the Energy Bill Relief Scheme replaced the Energy Bills Discount Scheme, introduced to help businesses with energy costs between 1 October 2022 and 31 March 2023. The discount was automatically added to energy bills and similarly, eligible businesses will now receive an automatic discount through the new scheme. However, it is important for clients to note that the Energy Bills Discount Scheme provides support to a smaller number of businesses compared to its predecessor. Most non-domestic customers will not receive any support, and those who do may experience a significant reduction in the amount of support provided.
If clients are still facing difficulties in affording gas and electricity bills, it is advisable to contact their supplier to discuss alternative payment options. Additionally, it is recommended to compare prices from different suppliers as there can be significant variations. It is important to remember that if your client is a microbusiness, they will only be billed for the energy consumed within the past 12 months.
- Grants and funding
The government website provides a wealth of information regarding grants, loans, and various financial resources available for small businesses. By utilising the search function based on business size and sector, SME clients can gain easy access to grants specifically tailored to businesses similar to theirs. Additionally, conducting a location-based search can assist in identifying local grants and schemes within their area.
Additionally, there are grants available for specific purposes, such as the gigabit broadband voucher scheme designed for rural businesses and grants for purchasing low emission vehicles. If a client’s business operates in the field of science or technology, they can explore the potential benefits of R&D Tax Credits.
