Unfortunately, insolvency is no stranger to IT companies. Although it has never been one of the most at-risk industries, failure rates in the information and communication sector have traditionally been quite high, with some businesses, such as IT consultancies and software developers, suffering more than most. The majority of these failures have been among smaller business, with the ICT and technology sectors home to a lot of start-up activity.
The Potential Impact Of Brexit
Brexit is one of the biggest questions facing businesses today, and when it comes to the ICT sector, there is evidence to show the continued uncertainty is starting to hamper performance. The falling pound has already led to higher PC prices, with Dell and HP confirming a 10 percent price rise to UK retailers back in July 2016.
There’s also been a decline in consumer confidence and household consumption, and an increase in the number of corporate IT projects that are being put on hold. Add to that the increasing reliance on smartphones rather than PCs and tablets and it’s easy to see why growth levels in the UK IT sector are down from 4.5 percent in 2016 to 2.6 percent in 2017.
While certainly not wanting to spread doom and gloom in a sector that is still forecast to grow above the UK average over the coming year, it is important that IT businesses owners have some idea of their responsibilities if do they start to feel the pinch.
Recognising The Warning Signs Of Financial Distress
IT company directors have a legal duty to ensure their businesses do not trade while they are insolvent. Failure to prevent this could result in lengthy directorship bans and personal liability for some or all of the company’s debts. The symptoms of an IT company that’s nearing or could already be insolvent include:
- Significant bad debts and an ageing debtor book.
- Overtrading – declining profit margins and a lack of capital to pursue new opportunities.
- High staff turnover.
- An inability to pay HMRC when taxes are due.
- Regular problems with cash-flow.
- CCJs or statutory demands issued against the company.
- Reaching your overdraft limit and not being able to access more finance without giving a personal guarantee.
The Insolvency Test
If you recognise one or more signs of financial distress in your business then the next step is to do an insolvency test. A company is said to be insolvent if it can:
- No longer pay its bills when they become due; and/or
- Its total liabilities exceed the value of its assets.
The cash-flow test is the measure of whether your company can pay its debts when they become due. If your creditors commonly impose 30-day terms for payment which you rarely meet, it’s likely you are trading insolvently. If the business is insolvent according to this test, you must stop trading immediately.
The balance sheet test measures whether the value of your assets is less than your liabilities. To carry out this test, you need to get an independent valuation of the company’s assets and measure this against all contingent liabilities. If liabilities exceed assets then your business could be on the verge of insolvency.
What Should You Do If Your IT Business Is Insolvent?
The simple answer is to seek advice immediately. There is a very fine line between insolvent trading and wrongful trading. In some cases, a company may continue trading without it necessarily meaning the directors are acting incorrectly. For example, if money is owed to the company by customers which exceeds the amount the company owes to its suppliers, there’s clearly no intent to act irresponsibly if the directors continue to trade.
On the other hand, if the directors continue to trade despite knowing the business will not be able to repay its creditors in full or in a timely manner, they could be guilty of wrongful trading. What makes this situation worse is if by continuing to trade, the directors increase the debts owing to their creditors.
If you feel your IT business could be insolvent, the important message is to act now. There is help out there that can give you a better understanding of your position and help you consider your options. With a little advice, it may be possible to completely turn your business around simply by looking at alternative finance options or focusing your attention on your core activities. However, this help will not come to you, so it’s essential you ask for it now before it’s too late.