The state of being insolvent is when a business can no longer pay its debts. Insolvency can be very distressing no matter which sector you operate in and alarm bells may be ringing if your business is finding that it is borrowing more and slowly struggling to pay bills on time. Making sure that you can spot the warning signs of insolvency is vital if you are to take appropriate and prompt action to increase the likelihood of business survival.
The Warning Signs Of Insolvency
Though a short period of financial difficulty does not necessarily mean that a company is insolvent, there are a number of warning signs of insolvency to watch out for. The list is by no means exhaustive, but paying attention to whether your business is experiencing the following warning signs of insolvency can give a good indication of the direction you may be headed:
Reaching Borrowing Limits
If your business has reached its borrowing limits, insolvency could be a possibility. When you are no longer able to borrow money, it can be harder to pay suppliers and creditors as alternative sources of funds will be required. You may also be refused further credit, initiating a cycle of not having the money to pay debts.
Chased Payments
Chased payments or demands from HMRC are a huge warning sign of insolvency and it is important to act as quickly as possible if your business finds itself in this position. Payment issues can start by simply delaying or prolonging making a payment, but can quickly result in Statutory Demands and even a winding up petition and forced liquidation if you are not careful or prompt in your response.
Issues Paying Staff Wages
Another common insolvency warning sign is not having enough money to pay your staff on time. Struggling to pay wages is a key indicator of cash flow issues and getting behind on payments can quickly escalate into bigger issues. If your business is in this position, staff will be unhappy and it is important that you communicate as transparently and efficiently as possible to limit any knock-on effects such as mass staff departures.
Incomplete Or Incorrect Reporting
Businesses have a duty to accurately report financial performance. Not only does this information instil trust in shareholders and creditors, but it also makes it easier to make decisions internally. Failure to properly report on cash flow and sales can be a warning sign of insolvency as it suggests that financial decisions are being made without the right evidence. Critically, this can limit the recovery options available to a business.
Overtrading
Overtrading is when a business takes on more work than it can sustainably fulfil and often happens as a result of rapid or poorly planned growth. When a business overtrades, it may take on supplier contracts and staff that it cannot really afford to meet increased demand. Cash flow can run dry as a result, leading to increased borrowing and delayed payments which can quickly spiral into insolvency.
Reduced Profit Margins
Pay attention to how the profit margins of your business change over time. Declining profit margins can be one of the main signs of insolvency, indicating that you are no longer making enough money to cover business costs. This can be a particularly precarious position to find yourself in, particularly if turnover has not reduced, suggesting that you may be taking on costs which are unsustainable.
What To Do If Your Business Is Experiencing Warning Signs Of Insolvency
If your business is experiencing one or some of the warning signs of insolvency, act promptly. Getting in touch with a business recovery expert at the first signs of trouble will increase your chances of survival and ensure that you have a complete understanding of all of the different options and solutions that may be available to you.
The team at Ballard Business Recovery are experts in helping businesses understand their financial situation and advising on the best ways to deal with and overcome possible insolvency. Contact us today to start the process of receiving trustworthy and personalised advice for your business.
