As the cost of living crisis continues with no sign of it ending in the near future, increasing numbers of businesses are facing company insolvency. Each week in the news, there are headlines of companies of varying size and sectors going into administration, so it’s important for directors to be aware when their business is in danger of insolvency.
When you are running a business, it can be easier than you would think to miss the early signs that your company is facing insolvency. Whilst not every late payment taken has severe consequences, when business owners fail to take a series of late payments or building debts seriously, insolvency may be unavoidable.
It’s also essential for business owners to identify when companies that they hold contracts with, including suppliers and customers, are heading into the insolvency danger zone. Should a customer be in debt to you for a significant amount, or a supplier fails to deliver the goods or services you require, this can have critical implications for your company.
Company insolvency warning signs
To ensure that you have options available when facing insolvency, and to be aware when customers or suppliers may be experiencing financial difficulties, there are certain early signs to look out for.
Late payments
If a company is failing to meet payment deadlines and facing an increase in pressure for payments from creditors, this is a warning sign for insolvency. If they are served with a winding up petition (a legal action taken by creditors to liquidate a company so that the assets can be sold to pay debts owed), this is the most obvious sign of insolvency.
Seeking credit
A further sign of a company in financial difficulty is when additional credit is sought in order to deal with cash-flow problems. Credit should only be used as a temporary solution very occasionally, so if a company is regularly seeking additional credit, or extensions on credit, this is a sign that they are experiencing serious cash-flow problems.
High turnover of staff and management changes
It is quite normal to see new management appointed to help change the fortunes of a business that is struggling, however, if a company is also showing other signs of insolvency, then the timing of this change in management can be a warning sign.
If a business is also experiencing an abnormally high turnover of staff, this points to a poor working environment, which can be indicative of a company that is facing insolvency.
Failing to file accounts on time
If a business is not filing its accounts on time, this is a strong indication that directors do not have financial control or are in the middle of considerable financial difficulties. It may be that the business is in a difficult position where publishing their accounts would show contractors and creditors that they are unable to reconcile their assets and liabilities.
When to call a Licensed Insolvency Practitioner
If you identify signs of company insolvency in your business, or indeed, in one of your customers, it’s important to talk to a licensed insolvency practitioner as soon as possible in order to discuss the best course of action to take for your business.
Remember, whilst you are focused on your business’s cash flow, it can be easy to miss warning signs from customers. However, if a customer is experiencing problems and is unable to pay their debts to you as they fall due, their financial issues could have a domino effect on your business, leading to building debts to your creditors.
BEACON LIP are independent insolvency practitioners in the South of England, providing guidance to businesses experiencing financial problems.