Business Running Out of Cash? Why "Keep Going" Can Be Bad Advice

"Never give up" is some of the most expensive advice I know.

It sounds brave, and it feels loyal to the people who work for you. But when your business is running out of cash, carrying on without a clear plan leaves you with fewer choices and more debt than you started with. I know that is hard to hear, because I have been on the receiving end of it.

During the credit crunch I sat down with the balance sheet of my web development business and worked out that it was £82,000 in negative equity. I traded through the problems and eventually brought the business to a close, and for a long stretch of that time I was forecasting the bank balance just a few days ahead, one supplier payment at a time. Looking back, I wonder whether speaking to an insolvency practitioner sooner would have given me a better route out. I cannot know that now. Getting through it does not prove I chose the best way through it, and I think a lot of owners confuse the two.

That was one of the reasons I wanted to talk to Iain Nairn of Leonard Curtis on AskJT. I wanted to understand what choices an owner actually has when things start to go wrong, and why so many of us are so reluctant to ask for help until the choices have run out.

My view is that asking for advice early is part of being a responsible business owner, and we should make that conversation easier to have.

What insolvency actually means

I am talking about limited companies here. Sole traders and partnerships carry different personal risks and have different routes, so treat this as a starting point rather than the whole picture.

There are two common tests. The first asks whether the company can pay its debts as they fall due, and the second asks whether its liabilities are bigger than its assets. You will hear these called cash flow insolvency and balance sheet insolvency, and both need a proper assessment rather than a glance at the bank app on a Sunday night. The Insolvency Service explains the tests and the options available.

For an owner, the first clues usually feel far less formal than that. You keep putting off your own pay. A tax bill gets pushed back a month, then another month. You spend more of your week deciding which supplier to pay than you spend running the business. Those are all good reasons to ask for advice, and you do not need to know exactly how serious things are before you ask.

What will be different next month?

There is one question I think every owner in this position needs to answer honestly, and early: what will be different next month?

A sound business waiting on a late customer payment has a completely different problem from a business whose prices no longer cover its costs. Both run short of cash, and both feel the same at two in the morning, but they need different answers. If your answer is a price change, a cut in costs or a real improvement in sales, then put figures and dates against it. If your answer is "something will turn up", the plan needs more work.

I think our business culture gives far too much credit to endurance on its own. Working longer hours and losing sleep show how much you care about the business. They tell you nothing about whether it can recover.

Borrowing more deserves the same hard questions

A loan can carry a viable business through a genuine gap in cash. It can just as easily fund another few months of losses and add a monthly repayment the business cannot afford, and from the outside the two look identical on the day the money lands.

Iain's warning about personal guarantees stuck with me. Before you sign anything, understand which of the company's debts you could end up paying personally. Get advice on the terms, and test the repayments against a realistic forecast rather than a hopeful one. Would the plan still work if your biggest customer paid late? What if sales stayed exactly where they are? What evidence do you have for the recovery you are expecting? An offer of finance does not answer any of those questions for you.

Talking to someone does not start a process

The useful part of an early conversation is that it shows you several possible routes while you still have the room to choose between them. Speaking to an insolvency practitioner does not put your company into a formal process. Practitioners advise outside insolvency procedures as well, as R3, the insolvency trade body, explains.

Depending on the facts, the routes may include:

Every one of these has costs, conditions and consequences, and there is no best option that applies to everyone. None of them fixes weak prices, poor margins or a lack of demand either. A debt arrangement buys you time, but you still have to understand what caused the trouble and what can realistically change.

The people your business owes

There is another side to this story that I think gets left out. Behind an unpaid supplier invoice is often another owner trying to cover wages that week. When we talk about writing off debt or starting again, we should remember that someone else may be carrying the loss.

I support giving owners a fair chance to recover. I also think the advice should be honest about who pays for it.

Once a company is insolvent, directors have to put creditors' interests at the centre of their decisions, protect the company's assets and avoid making creditors' position any worse. Limited liability does not remove every risk of personal responsibility, and the Insolvency Service sets out directors' duties in plain terms.

An insolvency practitioner appointed to a formal role has duties to creditors too, so you need to understand who they are acting for, what the proposed process involves and whether you need separate advice on your own position. R3 explains the practitioner's role. That is why I would ask any adviser to explain the alternatives, the fees and the main risks before I agreed to anything. Good advice should help you make an informed choice, including when every choice on the table is a difficult one.

Where I would start

If cash is tight right now, my starting point would be simple.

1. Get the facts together. List the cash you have, the money owed to you, the debts you owe, the payment dates and any personal guarantees you have signed.
2. Build a realistic cash forecast. Include wages, tax, loan repayments and the costs you cannot avoid, then test what happens if your customers pay late.
3. Speak to your accountant promptly. If insolvency might be an issue, bring in a licensed insolvency practitioner without delay. Do not wait until the records are perfect before you make the call.
4. Check decisions before you act on them. Take advice before adding debt, moving assets or making payments to yourself or anyone connected to you, and keep a record of the advice and what you decided.

Sometimes a business can recover. Sometimes a planned closure is the most responsible route left. Either way, the outcome deserves a clear look at the facts rather than another six months of hoping.

I want owners to feel able to have that conversation without shame. Financial trouble is frightening enough on its own without feeling you have to hide it, and you do not need to arrive with a solution. You can start with one honest sentence:

"The business is running short of cash, and I need help understanding my options."