7th January 2021
The loss of a major customer of client can be devastating to a company. There are two main potential issues you need to be aware in this type of situation; the first is if they owe your company money perhaps through invoices they have failed to pay; the second is how you are going to replace the custom they once gave your company. Each problem has the potential to cause serious knock-on effects to your own company if plans are not put in place. Let’s take each point separately.
1. The customer owes you money – When an insolvent company goes into liquidation this means it simply does not enough money to meet its liabilities in full. This unfortunately often leaves other companies they had dealings with out of pocket.
Once a liquidator is appointed they will take charge of the insolvent company’s assets and set about achieving as much money for these as possible. These funds will then be distributed among the company’s outstanding creditors. However, it is important to know that certain creditors take priority over others when it comes to receiving payment. First in line are secured creditors. These are those who have a legal charge over a specific asset, typically property, vehicles, machinery, or other valuable items. Next are preferential creditors which include employees who can claim for redundancy pay, unpaid wages, holiday pay, and notice pay.
Unfortunately unsecured creditors, which include trade creditors, landlords, contractors, and HMRC, are near the bottom of the pile. Depending on the scale of the financial issues the company was experiencing prior to its liquidation, as an unsecured creditor you may have to prepare yourself for receiving very little, if any, of the money owed to you. With this in mind you need to think about where this will leave you and your company should you be left empty-handed. Can you afford to write it off as bad debt or does this non-payment have the ability to tip your own company over into insolvency?
If you have any concerns as to the future of your company following writing off unpaid invoices, you should make it a priority to seek professional advice from an insolvency practitioner. By acting quickly plans can be put in place to help mitigate the knock-on effects of client insolvency, giving you the breathing space you need to get your finances back on track.
2. Replacing lost work – The loss of an important customer whether through insolvency, or any other reason, can be disastrous. The exact impact of this will depend entirely on how much you relied on their custom. If this customer was one of several significant sources of work, you should be in a reasonable position going forwards. With other customers continuing to provide a continued source of income, albeit reduced, you should have the time needed to trade out of these issues while you look to replace this lost work.
If, however, this customer represented a significant amount of your total volume of work, you may find things more challenging. As you do not have other large customers to tie you over, you may find your income drops significantly. If this happens your cash flow can grind to a halt surprisingly quickly making it difficult for you to pay your suppliers, staff, and HMRC on time. You should therefore make it an absolute priority to fill this gap with new work.
A good place to start is by talking to your current customers and seeing whether you could offer them more than you currently are. This could be in terms of volume of sales or the specific services you are providing; upselling to existing customers can be a great way of increasing your revenue but it is likely that this will not be enough on its own. Ideally you will want to find new customers; this could mean increasing your marketing output, upping your networking activities, or reaching out to past clients.
During this time it is vital that you keep a close eye on your efforts and be honest with how much money you are bringing into the business. Although it may be difficult to admit, you need to be truthful with yourself and know when your company is simply not working.
If you fail to secure enough work to return your cash flow to a healthy level, you need to contact a professional who can talk you through the options available. This may mean a process of restructuring to make your debts more manageable, negotiating a time to pay (TTP) arrangement with HMRC, or looking at closure options.
Real Business Rescue’s team of insolvency practitioners can help you every step of the way. We understand how the liquidation of a company can have knock-on effects to its customers and suppliers, and we have years of experience helping in these situations. Contact us today to arrange a free initial consultation with any one of, Our extensive office network comprises 100 offices across the UK with a partner-led service offering immediate director advice and support.