Adhere to directors duties
The most important thing you can do as a director is to know your legal duties, according to the Companies Act, and to follow the rules set out by your own company’s Articles of Association.
Be aware of your responsibilities, especially if the business were to struggle in the future, because your duties as a director would then change. For example, running a business is generally for the benefit of shareholders, but if it becomes insolvent, your duty is to maximise creditors’ interests. Shareholders must take a back seat.
Poor management and failure to follow your duties as a director could result in wrongful trading, personal liability, fines and even disqualification.
Run the business
It can be easy to get swept up in day-to-day filing and admin tasks. It’s the director’s duty to plan and focus on business strategy, creating a clear way forward and setting goals for the entire company.
Consider a business advisor or mentor to help identify any problem areas within the business. Fresh ideas and insights could bring a new positive outlook and help plan key objectives for the future. A review of the financial management is also a must if you’re concerned about cash flow.
Review your accounting and management procedures
Keep your accounting software up to date and ensure you’ve employed or outsourced a reputable certified or chartered accountant to handle the accounts and financial side of the business. You wouldn’t believe the number of times we’ve heard a worried director say, “Our business has failed because our accountant messed things up!”
It can be hard to hand over financial accounts to someone else, so reputation and references are essential when choosing a chartered accountant or accountancy firm. Keeping track of what’s going on will also reveal any warning signs. Not a whiz at finance? You’ll need to find someone who is. Don’t let your business fail because of some bad accounting work.
Prevent cash flow problems
Enforce stricter payment policies if the business’s cash flow is suffering from late payments and improve your debtor collection to keep control of the company’s finances. It will be easier to pinpoint problem areas and find solutions.
There are always ways to cut costs within the business. Start with a daily cash flow spreadsheet to break down day-to-day income and expenditure. You can then see what areas need reviewing to bring costs down.
If the company is struggling, be very cautious of putting your own personal finance in to support the business. If it deteriorates and the company becomes insolvent, you will end up losing that money. A way to mitigate this is to try and get any of your own lending secured, i.e. higher up the list of creditors, in case there are problems. You will need to register a charge with Companies House, so ask a lawyer for advice about this.
Improve security and risk management
With expensive assets, there must be security as well as risk management plans in place. Determine any threats to the business and improve security measures to tackle vulnerabilities and weak spots. Be aware of potential damage to the business that can be caused by clients (possible loss of future contracts) and customers (what if they become insolvent, how can your company manage?). If your company falls into debt and financial issues are ongoing, the business could be served legal action.
Consider a business asset sale or pre-pack if the business is not viable
Protect your assets with a business asset sale (BAS) or potentially a pre-pack administration. A BAS allows assets to be sold to a buyer who then takes ownership of these assets. The buyer can be the director, but remember it has to be at fair value as when the old company is put into liquidation, the liquidator needs to be sure that the assets were not sold cheaply. If they were, the liquidator can go to court and get the assets back.
A pre-pack is a quick and efficient formal process enabling a new company to be set up by one of the directors or a third party to buy assets from the insolvent company at market value. This transfer is handled upon immediate appointment of administrators. It is however more complex and scrutinised, therefore it is only suitable for bigger companies that have a viable business, and have had an immediate threat from one creditor that would not benefit the creditors as a whole. Always seek legal advice before you transfer or move assets.
Assess business insurance
Do you have the right business insurance in place? Many providers will offer an insurance package to include public liability insurance, professional indemnity insurance and employers’ liability, among others. With these you can cover losses against compensation or accidental injury in the work place, for example.
There is also Directors and Officers Liability Insurance, to cover financial loss if a claim is made against a director or officer by a third party.
Avoid personal guarantees if possible
Don’t give a personal guarantee unless you can personally afford to pay it back. A lender or landlord can call in a personal guarantee at any time and even if it’s the company’s debt, you will be personally liable. Keep private and business assets separate. In the worst cases, directors have had to sell their home to pay back the company’s debt.
Divide your company’s assets
The adage “don’t keep all your eggs in one basket” rings true here. It makes financial sense to divide your assets to protect them, just like investing.
Consider raising finance
From peer-to-peer lending to crowdfunding, there are many risk-averse ways to raise finance for your business. With crowdfunding, directors may lose some control of the business, but the risk of lending lies with the investor.
Invoice finance can also pose less risk to a company as it can raise money (albeit paying interest) on outstanding invoices. Compare the different options to find the most suitable finance for your company.
Always seek legal and financial advice if you’re unsure about any transfer of assets or changes to your company’s structure.
Written by Anna-Lisa Searle, Marketing Executive at KSA Group Ltd. KSA Group is a national turnaround firm and has rescued companies throughout the UK since 1997. It runs the website www.companyrescue.co.uk.