According to the Office of National Statistics. (ONS) in early April 2024, one in five (22%) of trading businesses were affected by current uncertainty. Long-term growth also remains a huge concern. This is therefore a good time to remind you to look out for warning signs of insolvency.
Common warning signs could signal financial and or operational problems within a company, even though insolvency can manifest in various ways.
Here are our top five things to look out for:
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Squeezed cash flow
Maintaining a healthy cash flow is at the heart of any successful business. Once cash flow becomes compromised, problems can quickly begin to mount so this should be seen as a warning sign of insolvency.
The financial position of the company may be unsustainable unless changes are made to improve the situation.
When assessing cash flow, you must consider both the incomings and outgoings of the company. Ensure you have a robust debt collection strategy that chases up late payers and minimises the risk of incurring bad debt.
We can recommend affordable software to assist you with debt chasing.
Investigate your outgoings and monthly commitments and consider whether any cost-reduction measures can be implemented to help boost your cash flow.
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Late payments to creditors
Being unable to pay your creditors as and when they fall is another warning sign of insolvency.
We understand that dealing with creditors can be a stressful experience. It’s not uncommon for creditors to put pressure on you to recover the money you owe. This can make you feel overwhelmed and uncertain about how to proceed.
It can also lead to unintentionally prioritising some creditors over others. If this happens when you know your company is insolvent, this could be seen as a breach of your duties.
If you are struggling to pay all your creditors and need to prioritise which ones to pay, this may be an indication that you need to seek guidance from an insolvency professional quickly.
An insolvency professional can help you navigate through the process and provide you with the best solution to manage your debt. We would be happy to recommend an insolvency practitioner so you can have an initial informal chat.
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Unable to access credit
Perhaps you have maxed out your overdraft, your applications for business loans or credit cards have been rejected, or maybe your creditors are refusing to extend any further borrowing until you clear the outstanding invoices.
If any of these sound familiar, you may be at greater risk of insolvency. When creditors and finance companies begin to restrict your borrowing levels, this is often because they have assessed your company as riskier than they would like.
Limiting the amount you can borrow protects them from incurring further losses if your company enters into a formal insolvency procedure such as liquidation.
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Threats of legal action
We understand that falling behind on payments can make you feel anxious and even overwhelmed. It can be difficult to keep up with bills and expenses, and sometimes unexpected circumstances can make it even harder.
Unfortunately, if you owe a large amount of money to a specific creditor and have been struggling to make payments for a while, your creditor may become impatient and resort to legal action to recover their money.
It is important to take creditor threats of winding up proceedings against your company very seriously. Don’t ignore any threats of legal action.
Among all creditors, HMRC initiates the most winding-up proceedings. Therefore, if you have failed to meet your tax obligations and are not able or willing to enter into negotiations to arrange payment of the outstanding amount, you may face a winding-up petition.
This could end up with your company being forced into compulsory liquidation if the court believes your company to be insolvent.
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Unable to pay staff on time
It is crucial that as a business owner you prioritise paying your staff in full and on time. Failure to do so can result in a loss of confidence from employees, leading to a work stoppage until their wages are up to date.
Most directors will prioritise employee salaries as much as possible. However, if the company does not have enough funds to pay its staff, it should raise concerns about the company’s overall financial health.
What should you do next?
If you are concerned that your company may be experiencing financial difficulties and nearing insolvency, or if it is already insolvent, there are steps you can take to address the situation constructively. Don’t ignore the early warning signs of insolvency.
Seeking advice from a professional is your first positive step towards gaining a better understanding of your company’s financial position. Call or email your normal manager and we can explore options for rescue, recovery, or closure.