Company or LLP – law firm cashflow problems
What should you do if the practice is struggling? First thing to do is to establish if you are insolvent.
See the 3 tests below
The Cashflow Test
Simply – can your practice pay its debts as and when they fall due for payment? Is the company in arrears with HMRC or trade creditors and not up to date with the bank?
For example if you are not paying the deductions from employees for NIC and Income Tax across to the Inland Revenue on the 19th of the month following the month they were deducted, then your company may be insolvent. Have you met loan repayment dates for practice loans or bank loans? Is the VAT late?
If your trade creditors sell to you on say 30 days terms and you regularly pay on 90+ days, then the company may be insolvent.
The Balance Sheet Test
Simply does your company owe more than it owns, or are your business assets exceeded by your business liabilities? If yes, then the company is insolvent.
It is important to point out that this test should include contingent or prospective liabilities. (If you need advice on these issues email us).
The Legal Action Test
If a creditor has obtained a County Court Judgment, this may demonstrate your company’s insolvency and the creditor may petition to wind up the company.
If a creditor has obtained a statutory demand for greater than 750 and it remains unpaid for more than 21 days, then the creditor may petition to wind up the company.
Second thing to do is to use our free daily cashflow spreadsheet (EASY TO USE) and set out the expected cashflow in and out of the company over the next few months.
If you need any advice on filling this out we will provide this free of charge. Please call 0845 519 4930
This tool will set out what the likely cash position is in the business over the next few months and will help YOU decide which is the most appropriate option. If cash is drying up and there is no way to fix it then pre-pack administration or liquidation are the two main options available.
If cash is tight but still flowing then Plan A or B should be considered. If you know that good cashflow is coming through in the next few months then Plan A can be a powerful way to buy that time.
Plan B is a company voluntary arrangement, this powerful restructuring technique can help the company survive and make deep seated changes to lead back to profitability in future.
Thirdly please read our guides to