What happens if your company can’t break even?

Understanding the break-even point of your business and company health

When your business breaks even, it doesn’t make a profit or a loss. The break-even point helps you set prices and analyse the elements that drive profit in your business, however, and simplistically it involves calculating the minimum number of sales you need to cover your costs.

Knowing the break-even point allows you to make key business decisions to improve overall business performance, whether that’s related to setting unit prices, sales levels, or increasing profitability.

So what happens if your company can’t break even? If you don’t address the situation it can lead to further financial distress for the business, but there are steps you can take to improve the company’s performance.

What does it mean for your company if it can’t break even?

The company may be able to carry on for a period of time without breaking even, but if you’re not making enough sales to even reach the break-even point, you’ll start to accumulate debt.

Eventually this will escalate to the point that the company can’t pay bills as they fall due - this means it’s entered insolvency, and must cease trading. You also need to obtain guidance from a licensed insolvency practitioner (IP) in this situation.

It’s highly advisable to seek professional support well before this stage is reached, however, as it allows you to become fully aware of your options. So what options might be available to you?

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Additional funding

Even though the company might not be performing at its best, it’s still possible to obtain vital funding to support business continuity during this time. Alternative finance options, such as factoring and invoice discounting, or asset-based lending, are flexible and typically quicker to access than bank lending.

Depending on your type of business there may be a range of alternative finance options – merchant cash advances can improve business performance for retailers, for example. UK Liquidators has contacts with alternative lenders throughout the UK, and can put you in touch with suitable financiers.

Restructuring debts

Debt restructuring can take place on a formal or informal basis. It typically involves an extension to credit or lending terms to make repayments more affordable for the company, and so reduce pressure on cash flow.

You could negotiate informally with each of your creditors individually to reduce your monthly payments, but there’s also an official procedure called a Company Voluntary Arrangement (CVA) that makes the agreement legally binding.

A CVA generally lasts for two to five years and can be instrumental in supporting viable businesses with temporary financial issues, allowing them to trade through their difficulties and become profitable again.

Company administration

If you’re experiencing severe pressure from creditors, placing the company into administration can be a good idea. It protects the company from legal action by providing an eight-week moratorium period, during which time a plan can be made for the business’ future.

It may be possible to sell the business out of administration, or some parts of the business, or potentially enter into the Company Voluntary Arrangement described above. If the situation is so bad that the business can’t continue, however, company liquidation may be the only option.

Creditors’ Voluntary Liquidation (CVL)

If the company’s financial position worsens to the point that the business must be liquidated, we can support you in voluntarily placing your company into liquidation. This protects your creditors’ interests, which is a legal obligation for limited company directors, and closes down the business in an orderly manner.

Redundancy is also available for eligible directors when their company is placed into liquidation. You may be able to make a claim for statutory redundancy if you’ve worked for the company as an employee for two years or more. 

CVL allows you to meet your legal obligations as a director when your company can’t break even and there’s no chance of improvement. Creditors are repaid from the proceeds of asset sales, and any debts that cannot be repaid from this process are written off.

For more information on Creditors’ Voluntary Liquidation, director redundancy, and other potential measures if your company can’t break even, please contact our partner-led team. UK Liquidators offers free, same-day consultations, and operate from a wide network of offices based around the country.