What are the warning signs of a struggling business?
It has recently been reported that many UK businesses are in financial distress. One in 304 active companies (at a rate of 32.9 per 10,000 active companies) entered liquidation in 2021, which was in increase on 2020 but still significantly lower than the 41.9 per 10,000 in 2019 (pre-pandemic).
The latest increase is driven by the highest annual number of Creditors Voluntary Liquidations (CVL’s) since 2009. All other types of company insolvencies were lower than previous years with compulsory liquidations at their lowest since 1960.
Many businesses are still struggling, almost two years on from the start of the pandemic. The economic fallout from the pandemic, coupled with the rise in inflation will create economic storm which will be difficult to navigate. So what are the key signs of a company in financial distress?
How to Identify when a Company is in Financial Distress
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 facing pressure from its creditors (whether the bank, finance providers or its suppliers) this is usually a sign that action is needed. You may have noticed 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 it may also make it more difficult to obtain further investment if needed.
- Managerial Changes
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.
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.
A Licenced Insolvency Practitioner is qualified to provide advice on all of the options available, even if an informal solution might be best. However, if the problems are too significant and the company cannot survive, they can explain what course of action is the most appropriate in those circumstances.
Closing your company
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 friendly 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.