Understanding the warning signs of company insolvency

What are the common signs of business insolvency?

If you are worried that your company may be approaching insolvency, there are a number of warning signs that alert you to impending problems. Sometimes financial decline is such as long and gradual process that it is not obvious to directors, and it can be a difficult situation to judge accurately. 

You can assess whether or not you face significant problems by taking account of the following issues.

Inability to pay the bills as they fall due

Whether it is paying staff wages, the electricity bill, or the latest invoice from your stationery supplier, if you cannot afford it, your company could be facing insolvency. The definition of cash flow insolvency is an inability to pay bills as they fall due or in the reasonably near future, so you should apply this test to your own situation to get a better picture of how you business is faring. 

Creditor pressure

Are your creditors putting ever-increasing pressure on you to pay? Maybe you have received threats of legal action, or are unable to appease creditors with offers to pay by instalments – if creditor pressure is relentless, you need to seek professional advice as soon as possible as you only need to owe a debt of £750 for a creditor to petition for the company’s winding-up.

Overdraft facility at its limit

A bank overdraft facility is generally arranged as a ‘safety net’ for businesses – for occasional instances when cash is short, and you need temporary assistance until an expected payment comes through.

Constantly operating with an overdraft facility at its limit indicates your business is not coping with the current situation, and is not a sustainable way to operate. The bank will notice when your overdraft is being overused, and may take measures to prevent further borrowing.

Refused applications for borrowing

Being consistently refused borrowing indicates that, not only is your company in decline, but it could be close to financial collapse. You may be experiencing problems when ordering stock as suppliers take care to protect themselves from bad debt, or have exhausted all the company’s lines of credit.

Pay freeze for directors

When a company applies a pay freeze for directors, it suggests the underlying financial problems are overwhelming, and the business is becoming unsustainable. Not being able to pay yourself is a dire situation that affects your own financial health, as well as the company’s. Further problems may arise if you or other directors have provided personal guarantees for company borrowing - they may be enforced should the company become insolvent. 

Late payments to HMRC

HMRC is a particular threat if your company has fallen behind with tax and National Insurance liabilities. They have a record of winding-up companies they believe to be insolvent, as allowing them to continue in business simply adds to the debt. If you are in arrears with HMRC, this could present the biggest risk to your company’s recovery.

You are not paid on time by your credit customers

Failing to have efficient debt collection procedures in place has a devastating effect on your cash flow, and can ultimately lead the company into insolvency. Reducing the time it takes to get money in helps you operate with a healthy level of working capital each month, and is a good foundation on which to base business recovery.

Constantly dealing with problems in the business

As a director, you may have to deal with constant issues throughout the day. This results in stalemate for your business, as it takes away your focus from moving forward. Maybe you are fielding phone calls from angry creditors threatening to take legal action, or dealing with a cash crisis as you cannot pay your staff. The problems seem to outweigh the solutions, leaving you demoralised and stuck.

Lack of management information

One of the most important factors in running a successful business is knowing your figures. This is achieved by having an effective management information system at your fingertips, whereby you can see when cash shortfalls are likely, for example, or be aware that sales are down for the third month in a row. 

It is easy to set up such a system, given the technology available these days – once installed you may be able to halt the decline you are currently experiencing, and return to profitability.

If you are worried about your company’s financial situation, and believe you are close to insolvency, it is imperative to seek professional advice from a licensed insolvency practitioner.

Real Business Rescue specialises in company rescue and recovery, and can arrange a free initial same-day meeting to identify your best options. Call one of our expert team – we work from a network of 83 UK offices.