Economically, the last decade has seen many challenges for companies in the construction and renovation sectors. Recessions, pandemics, ever-increasing living costs, and recently imposed tariffs on goods and services going in and out of the United States have filled the headlines and given many directors cause for concern.

So, how can you prepare your company for further economic uncertainty, and what can you do if your company is currently struggling to repay its liabilities or you think the company could be heading in that direction?

The following applies if you operate your business through a limited company, with specific reference to measures that could affect those based in the UK. Sole traders or ‘one-man bands’ have different options and considerations.

Stay on top of your company’s liabilities

As a company director, you should always be aware of your company’s financial standing and whether or not it is insolvent.

Cash flow problems and an inability to pay your company’s bills and liabilities when they fall due are some of the first signs that the company either may soon be or is already insolvent.

Pay special attention to anything outstanding with the tax office, as these can have severe repercussions if ignored.

If your company is already in a repayment arrangement with its creditors, make sure the payments are still at an affordable level. If they start draining your company’s bank account, it may be time to consider renegotiating or at least speaking to the creditors about that possibility.

Additionally, you should stay on top of any outstanding amounts your company owes, such as overdrawn directors’ loan accounts, which can become an issue if the company becomes insolvent.

Watch out for any signs of deterioration

As previously mentioned, an uneven balance sheet and other cash flow problems can be a sign of an insolvent company.

Another sign of financial deterioration, or that it may soon be a problem, is pressure from your company’s creditors.

Look out for repayment reminders from these creditors. In the UK, if these aren’t addressed, they can lead to more serious forms of debt recovery action, such as County Court Judgments (CCJs). These will negatively impact your company’s credit file and make it harder to obtain credit going forward.

Financial deterioration doesn’t always come from careless spending or mismanagement of company funds. Sometimes, external circumstances could contribute to your company’s financial troubles.

In the construction, maintenance, or renovation industries, these could include:

• Clients or customers not paying on time for work already completed
• Increased insurance premiums to cover specialised work
• Fluctuating costs of materials and equipment
• Changing regulations and compliance issues that necessitate additional investment
• Higher wages for skilled tradespeople or delays in work when enough of these can’t be sourced

If you find that your company is struggling to stay on top of its liabilities, then it may be time to have a look at the company’s balance sheet and see if costs can be cut.

While it could be tempting to cut everything back to the basics, any cost-cutting should be done carefully. Removing or downgrading elements that your company relies on for success, like paying highly skilled tradespeople, or purchasing high-quality materials, could lead to lower-quality work.

Subsequently, this can lead to further issues, like a loss of reputation, a potential risk to workers’ safety, and, if it results in a lower quality of work, it can lead to additional expenses to fix.

Deal with any risk of insolvency promptly

If you’ve looked at your company’s finances and find that it could soon be insolvent or it already is, you should act immediately and decisively to ensure the problems don’t escalate to the point where they risk the company’s future.

As previously mentioned, if you ignore repayment reminders, your creditors could apply further pressure through measures like CCJs. In the UK, for example, if these remain unaddressed, not only will they harm your company’s credit rating, but they could lead to visits from bailiffs and debt collectors. At worst, they could even apply for a winding-up petition, which would force the company into compulsory liquidation and make trading impossible.

If your company is awaiting payment from a supplier, contractor, or customer, then you can send them a repayment reminder and pursue further action if necessary, the same as your creditors would to you.

Remember to look after your employees

While it is easy to concentrate on getting your company through a tough economy or out of its insolvent situation, it’s important to look after your own mental health and that of your employees. They might not know the company’s specific problems but may sense something is amiss, which could negatively impact their mental health and leave them worrying whether the insolvency could affect them, as well as other longer-term consequences.

Know your options if the situation worsens

If you reach a point where your company cannot feasibly pay its liabilities, it is insolvent. If you have no options to alleviate the problem, you should seek formal insolvency advice. While this may seem a scary prospect, it is ultimately in your company’s and its creditors’ best interests to pursue this action.

Which insolvency option is best for your company depends on its circumstances, so you should discuss your situation and options with a licensed and regulated insolvency practitioner.

In the UK, if your company has a viable business model, which could include a healthy order book or a large customer base, it might be possible to repay a portion of its debts through a formal repayment arrangement. This is called a Company Voluntary Arrangement (CVA) and allows the company to continue trading while it repays an affordable amount on a monthly basis, retaining its relationship with suppliers and customers.

As it is a formal process, it is managed by a licensed and regulated insolvency practitioner, who acts as a buffer between your company and its creditors. The arrangement usually lasts five years, with any remaining unsecured debt written off upon its conclusion.

If the company’s issues are deeper-rooted, restructuring may be required. In this case, the company may enter administration. During this process, an insolvency practitioner takes control of the company and makes the changes necessary to return it to a profitable, viable state. If that isn’t possible, they will look into other appropriate exit strategies, including the potential sale of the business and its assets or transitioning to an alternative insolvency procedure.

If the company’s debts are of such a level that recovery isn’t feasible, it might be best to close the company down through a formal liquidation. By entering a Creditors Voluntary Liquidation (CVL), the company ceases operations, with its assets realised, and removes any creditor pressure. Once the company is closed, its debts die with it, allowing the directors to move on and start afresh.

To summarise

If your company is facing tough financial times, or one or more external factors are piling up and making trading difficult, there are several steps you can take to prepare the company should the worst happen. Always be aware of your company’s solvent status and watch out for signs of deterioration. Take steps to mitigate the risk of becoming insolvent while remembering to look after your employees. If the company does become insolvent, deal with the issue promptly and contact a licensed and regulated insolvency practitioner. Doing so will put you in the best position to achieve the most desirable outcome for your company.