Warning signs that your business is in financial difficulty

Company insolvencies increased substantially last year (2022).  In 2022, company insolvencies rose to 22,109 – the highest levels since 2009 and 57% higher than the previous year.  The number of voluntary liquidations (CVL’s), in 2022 was the highest number since records began in 1960.

The construction, retail, and hospitality industries were badly hit.  Now, many UK businesses, which are still dealing with the economic fallout of Covid-19, the cost-of-living crisis and rising inflation, will find these challenges difficult to overcome.  So, what are the key indicators that a company in financial distress?

What are the warning signs of Insolvency?

There are many early warning signs that indicate that your company is experiencing financial difficulty.  Being aware of these signs and knowing what action to take could help you to prevent losses, or your company becoming formally insolvent.

• Cash flow

When business payments and expenses exceed its income (sales), the company is cash flow negative.  This may be a temporary problem, but if cash flow stays negative over a sustained period it is a clear indicator the business is in trouble.  Pay close attention to your financial records and future projections.

• Creditor Pressure

If your company is under pressure from its creditors (whether the bank, other finance providers or its suppliers) this is a clear sign that action is needed.  You may notice that your company has reached the limit of existing facilities, has accrued arrears on long-term agreements, or is exceeding payment terms with its suppliers. 

• Debt-to-Equity Ratio

This ratio measures how much debt a business has compared to its equity and is a measure in assessing debt default risk.  The higher the liabilities, the greater the risk to investors and lenders.  You are likely to find that lenders seek personal guarantees or security against personal assets which is an indication the company is in trouble.

• Managerial Changes or Low Morale

A breakdown in the senior management team, or the departure of key personnel can also be red flag.  A business needs its employees to function and if your company has suddenly lost valued members of staff, or cannot make competitive offers to replace them, this could lead to wider issues.

• Reduced Profit Margins

Sales are obviously important, but profit matters much more in relation to growth and long-term survival.  Falling margins suggest that costs are too high, and sale prices are too low.  With many businesses facing increases in their operating costs at present, you may need to consider whether part of this increase can reasonably passed on to customers or look for ways in which to keep costs down. 

Of course, this list is not exhaustive, but the presence of one or more of these issues is a strong indicator that your company is struggling.

What should I do if my business is struggling?

The most important thing to do is seek advice from a Licenced Insolvency Practitioner, before the position deteriorates.  By speaking to a Licenced Insolvency Practitioner, you can work together to establish whether the problem is temporary, or whether more formal action is required.  If the problems are too significant and the company cannot survive, the Licenced Insolvency Practitioner can explain what course of action is most appropriate. 

Insolvency Practitioners – Company Closure

In many cases you will need to consider whether the company should be wound-up (formally closed).  Creditors Voluntary Liquidation (CVL) is liquidation on a voluntary basis.  As part of the CVL process, all assets belonging to the company will be identified and sold for the benefit of the liquidation process.

Keywood Group is a Licenced Insolvency Practice with offices in Birmingham and London.  Our team has over 20 years’ experience in advising businesses on their options, and dealing with company closure.  Our experienced team will work with you to assess the options available and guide you through the process. 

If you want further information, please contact us for a no obligation chat.