A contractor's guide to managing your business debts

It is always challenging managing your business debts as a busy limited company contractor. But your cashflow is your lifeblood. A company that is owed too much can easily go under, writes Matthew Fox, partner at Beacon Lip Limited.

That risk is even more pronounced in the current climate of extreme uncertainty, which is being fuelled by political turmoil in the UK; plus Brexit, Covid and Russia’s ongoing invasion of Ukraine. And those four key pressures are before your indebted business even considers the more predictable yet potentially more affecting challenges of rising costs and interest rates.

Information is power

Your bookkeeper or accountant should be able to provide you with a clear picture of your company’s debt, liabilities and cashflow, as well as the dates on which the amounts are due to be paid.

If they cannot, then you yourself can create a spreadsheet, which simply lists all of the debts.

Then, secondly, add further details, such as which debts are weekly, monthly and quarterly. It is easy to forget such things as rent, rates and HMRC bills, so remember to include those.

Doing this will give you a good picture of your overall debt, highlighting any particular peak periods.

Crunch the numbers

Next, analyse your income. What have you invoiced? And, given the payment terms you have in place with your clients, when are these amounts due to be received? If you know that a client is struggling or refusing to pay for some reason, you need to note that too.

Finally, you need to combine these two schedules. 

In doing so, you may well see that you should always have a surplus of income over expenditure. Well done if so! But if this is not the case, and you will have overall shortfalls for periods, you need to make arrangements.

What can you ask yourself if you look in the red?

If there are going to be shortfalls, then you need to consider how your business operates. 

Begin with some key questions:

  • Do you issue invoices promptly? 
  • Are customers paying on time, or should you be using incentives like a prompt payment discount, or even late payment legislation?
  • Can you reduce expenditure in any way? 
  • Can you review existing contracts with a view to switching your company’s suppliers (or your household suppliers) to reduce costs?

Then, think a little laterally if you don’t get the answers you need to the above questions.

For example, if one or more of your clients pays late, you could consider offering that small discount for a prompt payment. 

If a payment does fall overdue, you should speak to the customer and assess the issues. If necessary, to save your time, you could employ the services of a debt collecting company if you don’t think that mentioning, or even using the late payment legislation will correct their late-paying ways. If you do need to enlist a debt collection firm, find one that is known to operate in a very professional, friendly but efficient way. The right debt collection firm should be able to speed up the retrieval of the debt without losing your client for you in the process!

High view review

Now look at the bigger picture. Is there a wider change you need to make to head off commercial indebtedness or to stop your company falling into arears?

Maybe you are losing money in one particular area, because you are not as competitive as you should be. If so, can you simply raise your prices or introduce a different pricing structure? Do you need a higher profile? And related, is marketing your problem?

Don’t do nothing

If you do hit a period of shortfall, and you have a problem paying one of your suppliers, don’t ignore the matter. Often, if you pick up the phone and explain the reasons, a solution can be agreed – perhaps a part payment now, a payment plan over time, or simply more time to pay.

The earlier you address the issue, the more likely you are to reach an understanding with your creditor, whereas, if you leave it months past the payment date, they are obviously not going to be as receptive.

In addition, remember -- once you have agreed a clear, realistic plan of action, it is important to stick to it!

Ask a professional

If you have taken the above steps, and you are still concerned about the survival of your business, seek professional help as early as you can from a licensed insolvency practitioner. 

The earlier you ask, the more options are going to be open to you. It is vital that the person or organisation that you speak to is professionally licensed and qualified. Unfortunately, there are many advisers (especially 'online-only' advisers) who are not. If in any doubt, review their website for membership of professional bodies, such as ICAEW, IPA and R3.

A good, insolvency practitioner should be able to explain several different options to you in terms you can understand. They should explain the pros and cons, as well as any longer-term consequences, of each strategy. But really don’t delay -- the earlier you seek advice, the more options are going to be available to you, and the more likely it is that your business will survive.

Friday 8th Jul 2022
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Written by Matt Fox

Matt specialises in corporate and restructuring solutions with over 30-years’ experience having started his career in 1990 with Ernst & Young. He has since worked with other national firms, undertaking business restructuring in the UK and overseas. Matt later joined BDO undertaking restructuring assignments with the main clearing banks working in the property, construction and leisure sectors. Matt is now co-owner of Beacon LLP and is focused on helping SMEs.

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