Reviewed: 13th February 2017
Even if your company’s financial situation has not been a specific cause for concern in the past, it is very easy for a business to slip into insolvency. The loss of a key customer or general downturn in the market are just two examples of when cash flow problems can begin.
So if you can spot the early warning signs of financial distress and take proactive measures to prevent the situation spiralling out of control, your company will stand a much better chance of survival.
You will be able to seek professional help without the background urgency of impending closure, and more solutions will be available to you. So here are a few early warning signs to look out for, which might indicate a serious problem in the future.
So many factors can negatively impact your cash flow on a daily basis, that it’s easy to miss something important – the result being a significant threat to the company’s financial stability.
Poor sales or inefficient credit control procedures could be affecting your ability to pay the bills on time, but getting to grips with what is causing the problem can be difficult. The best way to do this is to manage your cash flow on a daily basis.
A simple spreadsheet that includes all expected incomings and outgoings is all that you need in this respect. You’ll be able to anticipate any problems ahead, and quickly chase up monies that are overdue to the company.
In some circumstances, cost-cutting is simply an attempt to streamline a company’s finances with a view to increasing profit, but it’s also often a sign of financial distress. Maybe you’ve negotiated with your landlord to defer the payment of rent for a couple of months, or feel that employment costs are generally too high?
It might seem a drastic measure to reduce your workforce at this early stage, but small spending reductions in other business areas may be all it takes to improve the cash position and stave off insolvency.
If your suppliers are continuing to deliver goods or services without question, even when you’ve requested an extension to your payment terms, it may seem like the ideal solution to ongoing cash flow issues.
The problem is that they only need to be owed £750 or more before they can petition for your company’s winding-up. If one or more of your creditors have been applying charges and interest to a debt, and contacting you regularly about late payment without success, they may feel this is the only option left open to them.
So if you miss a payment or have other pressing cash flow issues that regularly distract you, requesting extended payment terms from suppliers might be an indication of a more serious overall problem.
Increase your overdraft limit
Increasing the company’s overdraft facility will provide more working capital in the short-term. Being constantly at the limit will alert the bank to a potential problem, however, and they’ll start to look at your business performance for further signs of financial distress.
They will check for returned payments or cheques, look at the company’s credit rating, and highlight any refused or unsupported applications for other forms of funding.
They will also look at their own level of security for any existing borrowing, and whether it is sufficient, as well as whether or not you have chosen to seek professional advice about the company’s financial situation.
Additional funding and putting in your own money
Applying for additional funding to avert a cash shortfall, as opposed to using it for growth, is a sign of potential insolvency. You might have applied for asset-based lending to leverage the value of company assets, for example, or sold your sales ledger to a factoring company just to stay afloat from month to month.
The problem is that once you’ve exhausted all your lines of credit, you may feel there’s nowhere else to go unless you invest more of your own money in the company. Seeking professional advice at this stage will help to ensure you take the right action without unnecessarily jeopardising your own financial health.
When a profitable contract comes to an end and is not replaced with a comparable arrangement, financial stability can decline at an alarming rate. If you’ve been keeping an eye on the cash flow situation you’ll have had time to prepare for a potential shortfall, but otherwise this could signal the start of a downward spiral for the company.
Changes in directorship can indicate that one or more directors are worried about personal liability in the event of insolvency. Perhaps they are concerned about potential accusations of wrongful trading, or see that the company is struggling and want to ‘jump ship.’
Industry downturns such as those seen in the Aberdeen oil and gas sector, or the steel industry, can result in considerable financial hardship for companies once highly profitable.
Spotting a decline in the market at an early stage allows more options to be available to sustain the business and trade through a difficult period - heavy operating losses plus the closure of your suppliers/customers’ businesses is likely to lead to insolvency.
External influences such as leaving the European Union, or legislative changes made in the Budget, can have an adverse effect on business. Although there’s often a warning about impending changes to tax or company legislation, there’s not always enough time for companies to avert financial difficulties.
Real Business Rescue is a major part of the Begbies Traynor Group, the UK’s largest professional services consultancy. Our experts can provide guidance and assistance if your business is experiencing financial trouble - we have a network of 75 UK offices, and will arrange a free same-day meeting to discuss your situation.