Can accountants stop the insolvency rot?

November 2023 saw a 21% jump in insolvencies from November 2022, as 2,466 businesses filed for bankruptcy. Is there any way of slowing these growing statistics?

Jonathan Barber, Executive Director – UK, of the Institute of Financial Accountants (IFA), looks at the potential golden opportunity for accountants to assist SMEs in bucking the trend.

Unprecedented circumstances

The surge in insolvencies has been driven by a combination of economic factors, as businesses have encountered numerous challenges in recent years. Global events have led to higher inflation, shortages in staff, rising energy costs, and disruptions in the supply chain. Compounding these issues, governments have withdrawn their COVID-19 financial support.

A recent report revealed that over 47,000 UK businesses are teetering on the edge of collapse, with a 25% increase in firms experiencing ‘critical’ financial distress. Within the report’s coverage of 22 sectors, the construction and property industries make up a third of all businesses facing critical financial difficulties, while 18 sectors have seen double-digit growth in the number of firms facing dire financial conditions.

Untapped opportunity

Small businesses face the constant risk of financial distress and insolvency, which can arise gradually over a period of time or arrive suddenly due to unexpected crises. Financial distress often serves as a precursor to insolvency, and many SMEs encounter the possibility of insolvency at some point during their existence.

Despite their expertise in effectively managing cash flow, accounting professionals are often overlooked, undermining the value of this service in their multifaceted role of safeguarding the financial wellbeing of businesses.

Furthermore, accountants possess a unique capability to assist clients in potentially preventing or alternatively navigating through business distress and recovery, thereby enhancing their advisory services. By identifying warning signs that indicate a company is heading towards financial difficulty, such as cash flow problems, declining revenue, and mounting debt, accountants can play a vital role in guiding their clients to engage with insolvency professionals at an early stage.

This enables businesses to address and overcome their financial challenges. This approach is partly based on the utilisation of real-time accounting and banking information to develop models that can predict cash flow difficulties and critical points.

Encouraging clients to seek help from insolvency professionals at the first signs of financial distress offers them a broader array of solutions to address the problems. It also allows them more time to carefully consider the future of their business, which could lead to a more positive outcome instead of waiting for the issue to worsen.

In addition, accountants play a crucial role in reassuring their clients that consulting with an insolvency practitioner does not automatically mean a formal insolvency appointment. Insolvency practitioners always aim to assist in the rescue and recovery of a business whenever feasible.

Strategic support

In the midst of the persistent difficulties posed by the present economic landscape, accountants serve as invaluable allies, providing tailored, pertinent, and potentially company-rescuing guidance.

This guidance extends beyond the scope of an accountant’s responsibilities, but in their advisory capacity, they can direct clients towards various accessible resources that UK SMEs can utilise to successfully navigate through challenging periods, such as:

1. 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.

2. 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.

3. 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.

4. 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.

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