Muscles ache, dashboard lights flash red, babies and animals make noise and shout – there are many ways of being told that there is something wrong or about to go wrong.
But what about your business? Everything could be proceeding as it always has but how can you tell if there are critical issues about to explode just below a normal looking surface?
We’ll explore some of the reliable signs that a business could be heading towards insolvency if problems are left unchecked.
Every business is different and conditions are always changing but this non-exhaustive list will give you some ideas on what to look for and how, if left unchecked, could be damaging and ultimately critical for even the most efficient and well run firms.
What does it mean for a business to be “insolvent?”
First things first.
If a company’s financial liabilities exceed its assets and it can’t service its debts as and when they fall due – they are classed as insolvent.
Not every company experiencing financial difficulties is insolvent however. Short-term liquidity and cash flow problems or unexpected bills do not necessarily mean that a company is insolvent.
How do I know for certain that my company is insolvent?
In the Insolvency Act 1986 there are two basic tests which can help you determine when your company is insolvent:
- Cash flow test – The cash flow test deems that a company is insolvent if it currently, or will in the future, be unable to pay its debts when they fall due
- Balance sheet test – The balance sheet deems a company is unable to pay its debts if the value of the company’s assets is less than the amount of its liabilities. This test also takes into account contingent and prospective liabilities
If there is any doubt at all then get in touch for an impartial, professional point of view.
Otherwise read on to find out what some of the clearest warning signs are.
Warning signs from your bank
Modern banks use specific software and AI to highlight problems or as they see it, badly performing accounts. So if a business is heading towards trouble, they should have warning and indication sometimes before the business owners might.
Some of the obvious signs include:-
- Payments being returned due to insufficient cleared funds within an account
- Refusal to underwrite a loan or increase existing borrowing facilities such as overdrafts
- Asking for increased security on any new approved borrowing
- Demanding personal guarantees from directors as security for additional financing
Warning signs from your creditors
Most business owners and directors are used to dealing with creditors including demands for payment and security.
If trust has been built up over a period of time then this can go a long way to helping to smooth out any unforeseen bumps in the road but there are some definite signals that could alert them that things aren’t well including:
- Missed payments
- Creditors chasing payment for missed payments or before the payment is scheduled
- Ignoring creditors legal demands for repayment or communication
- Company unable to extend existing credit or obtain any new financing
- Opening many new accounts with new suppliers in short succession or simultaneously
Legal warning signs
The third category are definite indications that the business is in financial difficulty.
If any of these events have occurred then if you haven’t already then you should immediately get some professional advice from an insolvency practitioner.
- If bailiffs or High Court Enforcement Officers (HCEOs) have notified the company that they will be attending to remove property or if they have visited
- You have had Court summons over unpaid debts or have received a County Court Judgement (CCJ)
- You have received a statutory demand for repayment or a winding up petition seeking to close the company
If you recognise any of these warnings and are wondering what you can do next – we have some good news for you.
The chances are, if the business is at this stage then you will probably have more options to consider than you think but it is vital that you take action at the earliest possible opportunity, the longer you wait the worse the situation can get.
If it isn’t too late now, the longer you wait makes it more likely that it could be.