Reasons why companies go into liquidation

Over the years, I've observed the rise and fall of countless companies, each with its own tale of success or adversity. Some have achieved remarkable feats, sharing stories of triumph, while others, less fortunate, faced closure or were compelled to undergo the demanding process of liquidation. Let's begin with this: the way you'll feel a month after the liquidation will be significantly different from your current emotional state. If you currently find yourself in this situation, it's perfectly normal to experience feelings of anxiety and a diminished sense of self-worth. However, these feelings will evolve. Once the liquidation is complete, you will experience a profound sense of relief.

As I always stress to every client we support throughout this ordeal, remember that this circumstance does not define who you are. It's simply a financial chapter in the broader story of your life. Certainly, take heed of the valuable lessons this process can impart, but do not allow it to shape your identity. Avoid falling into the depths of despair due to this situation. It's a challenge to be managed, not one to procrastinate over.

Below I have listed a number of reasons why most companies need to file for liquidation.

1.Outstanding taxes with SARS

Many companies find themselves in the throes of liquidation primarily due to a single, critical factor. They make valiant efforts to salvage their business and meet their overhead expenses, often overlooking or neglecting their tax obligations in the process. These taxes encompass a spectrum, including income tax, PAYE, and VAT, with VAT frequently assuming the lion's share of the blame.

It is of utmost importance to establish a sound financial strategy for your business right from its inception. The most effective approach, particularly in the case of VAT, is one I have personally employed to great success, as have my clients who have adopted this method.

Every Monday morning, begin by retrieving your bank statement for the preceding week, covering Monday through Sunday, and tally the total turnover for that period. Next, calculate the inclusive VAT amount by multiplying this turnover total by 15/115. Transfer this calculated VAT sum to a separate account linked to your business account, preferably a call account that accrues some interest and imposes minimal (or no) banking charges. This process not only ensures you are well-prepared for your bi-monthly VAT obligations but also leaves surplus funds in the account. The reason for this surplus lies in the fact that your effective VAT rate, after accounting for deductible expenses, falls below 15%. This effective rate can vary depending on the specific industry in which your business operates.

2. Misusing customer deposits inappropriately

One significant cause of liquidation arises from the misappropriation of customer deposits, a prevalent issue, particularly within industries like construction. It's not uncommon for businesses to divert funds received as deposits from one client to complete projects for others. This practice can continue smoothly until interest rates surge or an economic downturn strikes. Suddenly, the influx of new projects dwindles, and business owners find themselves unable to perpetuate their usual "deposit rolling" practice. In this critical moment, the entire business structure teeters on the edge, and the cash flow comes to a screeching halt.

For those facing such a predicament and contemplating liquidating their companies, it's crucial to be aware that personal liability may come into play, and, in most instances, disgruntled customers might publicly expose you. These customers, understandably aggrieved, could resort to various threats.

The most viable solution in this scenario is to initiate discussions with each and every client once the liquidation process has commenced. These conversations aim to find mutually agreeable solutions. It may require completing their projects more efficiently over weekends or a longer-than-initially-expected timeframe. Clients might opt to handle direct settlements with suppliers while relying on your labor and expertise to finalize the project. Effective communication becomes paramount in this challenging situation.

To prevent this situation, it's wise to revisit the concept of separate bank accounts, or what I like to call "pocket accounts." Consider opening a dedicated bank account for each project, allowing you to systematically allocate deposits. This practice serves a dual purpose: not only does it segregate funds for each project, but it also enables effective monitoring to ensure profitability in each specific project.


3. Interest rate surges

When interest rates surge, both you and your business can find yourselves in a precarious position. Suddenly, vehicle repayments, bond instalments, and the interest on overdrafts and loans skyrocket with each rate hike. In such a situation, immediate planning often seems elusive, leaving you with no apparent solution except to consolidate some of the debt. This consolidation might help by reducing multiple debt repayments into a single, potentially lower monthly payment.

However, to steer clear of this predicament, exercise extreme caution when it comes to over indebting yourself or your business. It's a common tendency for individuals to expand their lifestyle as their income grows, leading to an accumulation of excessive debt. During times of economic stability, ensure you always have a financial reserve readily available to weather challenging months or potential recessions. Your aim should be to accumulate savings equivalent to 3 to 12 months' worth of overhead costs to navigate through economic uncertainties.

Resist the temptation to finance that brand new vehicle. Remember that the thriving summer economy can swiftly transform into a winter economy, making it increasingly challenging to meet monthly payments. When your monthly turnover catches the bank's attention, they often rush to offer debt options. Sometimes, egos get the better of us, and we eagerly accept all the money the banks preapprove us for. Avoid falling into this trap.

4. A specific niche market slows down

There's a well-known adage that goes, "Don't laboriously push a boulder uphill simply because you possess the strength." This saying holds true in the world of business. Sometimes, a niche market may lose its momentum or even become obsolete. Just because a strategy or approach worked in the past year doesn't guarantee it will yield the same results this year. Markets can be subject to trends that are beyond our control.

The key is to accept these changes and adapt accordingly. Failing to acknowledge the shifting landscape can lead a business down a gradual path of decline, ultimately reaching a point where it can no longer meet its operational costs, eventually facing the dire prospect of liquidation. It's essential to stay agile and responsive in the face of evolving market conditions.

5. Partner that cannot agree

Partners frequently hold divergent views on how the business should evolve, function, and distribute its finances. My firm belief is that most partnerships encounter challenges because, as both partners passionately pursue their individual business visions, clashes of ideas regarding the company's direction are inevitable. Despite both partners genuinely prioritizing the business's best interests, the authenticity of their personalities can lead to conflicts.

In numerous instances, partnerships find themselves at a crossroads, with financial disputes often emerging as a major stumbling block. When two partners cannot reach a consensus on financial management, it can signal the start of a precarious journey towards potential business liquidation.

6. Leader that refuse to grow

The final point, which could essentially encompass a combination of the preceding points, is that a staggering 95% of business leaders resist growth. They exhibit a reluctance to pick up a book in pursuit of education and a broader perspective.

When we delve into an autobiography, our comprehension of the obstacles on the path to success broadens. Engaging with the content of financial educational books enhances our grasp of how to effectively manage both business finances and personal affairs. It's remarkable how a single line from a book can pivot the trajectory of your business.

In essence, your business's growth will never surpass the effort you're willing to invest. Your external world consistently mirrors the work you've undertaken within.

The axiom holds true: "Show me the leader, and I can accurately gauge the team's performance and attitude." If you, as a leader, prioritize service, your team will naturally follow suit. Conversely, if the leader prefers the Friday night pub visit, the team is likely to follow that example.

It's essential to recognize that we are inherently designed to grow and expand. This is a matter of profound significance.