You don't have javascript enabled.

Opinion

Debt, done right: How AR teams prevent liquidation becoming a horror story

Voluntary liquidations in the UK are now three times more common than ever before, according to new research, and with external pressures like inflation and supply chain disruption continuing to mount, AR teams have become critical to ensuring financial stability.

  • January 21, 2025

By Simon Yaxley

In recent years, UK businesses have faced relentless economic pressures, from rising inflation and supply chain disruptions to increased borrowing costs. At the same time, it’s never been easier to quickly set up and dissolve a company, with the multitude of SaaS products making starting a business relatively cheap and straight forward.

This culmination of challenging external factors and flexible entry and exit strategies has resulted in business leaders increasingly choosing to liquidate their companies. In fact, voluntary liquidations are now three times more common than ever before. Against this backdrop, finance professionals must focus on what they can control – namely, cash flow and debt management. At the centre of these efforts is the accounts receivable (AR) function.

The AR function is uniquely positioned to manage debt effectively and support businesses through financial uncertainty. Its role spans guiding businesses through liquidation processes – whether voluntary or forced – and adopting proactive strategies to prevent such situations from arising in the first place. By focusing on debt control and cash flow optimisation, and leveraging technology, AR teams help businesses navigate financial pressures and build resilience.

Preparing for voluntary liquidation

When a business opts for voluntary liquidation, it’s rarely a sudden decision. Often, the warning signs – such as mounting outstanding debts or deteriorating cash flow – are evident long before the formal filing. AR teams are uniquely positioned to identify these red flags and mitigate risks.

A proactive AR function minimises liabilities through effective debtor relationship management. For example, by identifying high-risk accounts early, AR teams can work with customers to establish payment plans or adjust credit terms, reducing exposure to bad debts. At the same time, they can ensure the business has accurate insights into its total liabilities, enabling leadership to make informed decisions.

If voluntary liquidation becomes inevitable, AR teams must take decisive action to limit further financial exposure. This may include freezing accounts, moving them to a high-risk collection path, or halting the provision of goods and services. Robust bad debt provisions also helps to ensure the business can navigate the liquidation process with minimal disruption to creditors and other stakeholders.

AR’s role in crisis management

However, voluntary liquidation isn’t the only potential outcome of challenging external factors. Some organisations are also forced into liquidation if the company’s level of debt becomes too much to continue. During compulsory liquidation – often due to creditor actions – AR teams must act swiftly to protect the company’s remaining assets. The first step is typically an immediate account freeze, halting all products and services to prevent further accrual of debt.

Next, AR teams should triage accounts, prioritising high-risk debts for collection. This involves shifting to a high-risk workflow, where targeted recovery efforts focus on outstanding receivables that offer the greatest chance of return. Speed and accuracy are essential in these situations, as the window for effective collection narrows significantly during forced liquidation.

A well-prepared AR function, equipped with clear protocols and robust data insights, makes a significant difference in minimising losses during this challenging phase.

The preventive power of AR

The best-case scenario is, of course, avoiding liquidation altogether. AR teams can provide invaluable support by helping business leaders maintain positive cash flow and financial stability amid external factors that are outside of the company’s control.

One of the most important steps is to give leadership a clear picture of the company’s financial health. This includes understanding total liabilities, forecasting income, and identifying opportunities for cost savings or efficiency gains. For instance, by renegotiating payment terms with customers and suppliers, AR teams can optimise cash flow and create a buffer against external pressures.

Additionally, tackling aged debts – particularly those exceeding 120 days – should be a top priority. Reducing these outstanding amounts not only improves liquidity but also lessens the risk of bad debts dragging the business into financial distress.

Using technology to stay ahead

Modern AR functions have an edge that wasn’t available to their predecessors: advanced technology, including AI and machine learning (ML). These tools can revolutionise how AR teams operate, providing predictive insights that help businesses avoid financial pitfalls.

AI-powered algorithms can analyse payment patterns to predict the likelihood of invoice payment, both before and after the due date. This enables AR teams to proactively address at-risk accounts, implementing targeted collection activities before issues escalate. Late payment analysis can also inform future credit decisions, reducing the risk of further exposure.

Beyond predictive analytics, automation tools can streamline day-to-day AR operations, freeing up team members to focus on strategic initiatives. By improving efficiency and accuracy, these technologies empower AR teams to stay ahead of potential financial crises.

AR as a strategic partner

As the external factors contributing to the rise of voluntary liquidations in the UK continue to rage on, the importance of a well-managed AR function cannot be overstated. Whether guiding businesses through liquidation or helping them avoid it, AR teams play a central role in managing debt, improving cash flow, and ensuring financial resilience.

By using data insights, embracing technology, and maintaining proactive debtor relationships, AR professionals will transform their function from a back-office operation to a strategic partner in the business. In a climate of uncertainty, this shift could mean the difference between survival and liquidation.

For finance professionals, the message is clear: focus on the controllables and let your AR team lead the way.