Can a client’s insolvency affect your business?

Your clients insolvency can have an effect on your own business, especially if it happens that trade with that particular client makes up a large percentage of your business turnover. Hence, it is good business practice to have a mix of work so that if any one of your clients does enter an insolvency process, this will not have an extremely significant cash flow impact on your business.

It is also possible to minimise the effect of these problems with clients who may move towards insolvency by:

• keeping regular tabs on your client’s financial performance
• utilising credit referencing agencies or online information sources which tell you when your customer may be accruing County court judgements (CCJs)
• talking to other people in the same industry’s to see what experience they are having with that particular client
• keep a dialogue going with the client in order to build a relationship where they would feel comfortable to tell you that they are beginning to struggle to pay. Quite often it can be easier to get payment over time by an agreed plan, rather than wait until enforcement action is required.

Enforcement action can be very expensive because court issue fees have increased significantly in recent years, and there is far more attention now on mediation and working with customers to maximise returns, which is definitely a more sensible approach.

If as an accountant or advisor to an individual or company you become aware that they might be facing insolvency proceedings, this could clearly have an impact on your own business and practise, not only because you would not wish to lose fee income as a result of the client becoming insolvent and no longer trading, but also because as a close advisor of that business you may find that there are requirements upon you to assist an insolvency practitioner with information with regard to the tax affairs and any transactions between the company, its directors and perhaps associated businesses.

If you are not willing to provide this information it can be that, as the holder of information, you may be required to appear before a court to provide the information which would take more time away from your profitable work.  It is therefore always sensible to work with the insolvency practitioner in order to minimise the impact on your own cash flow.