Warning Signs That Your Company Is Heading Towards Insolvency

When your business goes insolvent, it means that your debts outweigh your assets, or your company is not able to pay its debts when they are due. Once this happens, your business becomes at risk of being wound up and having its assets liquidated to pay off your creditors. An experienced insolvency practitioner will help you through the process, and they may be able to offer a long-term solution such as a company voluntary arrangement, that can help you get out of debt.

However, the ideal scenario would be to not go into insolvency in the first place. With that in mind, here are some of the warning signs that your company could be heading into insolvency.

Dwindling Cash Flow

Businesses heading towards insolvency will burn through their cash flow quickly. Make sure you’re keeping a close eye on your balance sheets and monitoring how much is being spent. If possible, compare this year’s cash flow to the same period from previous years to see if you can establish a trend. You might be able to pinpoint what is the cause of the stagnate and make changes accordingly.

While cash flows often experience periodic dips, if your cash flow is always an issue, your business could be in trouble. Spending more than your company is earning will lead to serious problems.

Cannot Cover Operating Costs

If you are struggling with the day to day running of your business operations, that could be a sign that you are heading for insolvency. You may be forced to make cuts in places to keep essential operations afloat, such as cutting off staff perks like health benefits or selling off assets. When you start to notice that your operational costs exceed your income, this is a red flag that insolvency could be on the horizon.

Suppliers Taking Out Trade Credit Insurance

If your suppliers become frustrated with a lack of payment, they may take out trade credit insurance, which protects them from customers who fail to pay. This is a sign that there are issues with your cash flow. If your suppliers no longer trust you to get payment to them on time, they may end up taking out some kind of insurance to secure them, and you
should take this as a warning to take a close look at your finances.

Falling Margins

No matter how big your turnover, it cannot compensate for lack of profitability. If your margins are being squeezed, this suggests that your costs and expenditure is too high and the sale of your goods is too low. Narrow margins make companies vulnerable to the impact of changes
out of your control, like the cost of raw materials, interest rates or even
staff absences. Any sign of dwindling profits should be taken as a step towards becoming insolvent.

Demands for Payment

Your business may have received a Statutory Demand from a creditor, or maybe you have already received threats of legal action for your unpaid bills. A Statutory Demand is followed closely by a winding-up petition, potentially marking the end for your business.

If HMRC is chasing you for debt payment, you could be headed for insolvency. Penalties for late payment of taxes can be significant, making your troubled financial situation even worse.

Dividend Cut

Businesses that reduce or eliminate their dividend payments to shareholders could be heading for trouble. During financial difficulties, dividends are one of the first expenses to go. But it’s unlikely that dividends will be cut unless it’s necessary, as a cut is liable to send a company’s stock price plummeting. So any cuts to dividends are a clear sign that trouble lies ahead.

Making Late Payments

If you are routinely late in making important payments, that could be a sign of deep-rooted trouble. Keeping up with your financial obligations can be a challenge, but it is essential to keeping your business afloat. Late payments can impact your credit score, causing long-term consequences that may make it even more difficult to find a solution to your debt problem.

Issues with Staff

If your company appears to have unusually high staff turnover, or there is an issue with paying staff on time, this could be another sign that your cash flow is either being poorly managed or the funds just simply aren’t available. If staff are consistently leaving, it could be because they are frustrated by late payments, or they have no confidence in the company
to stay afloat for the long term, leading them to seek employment elsewhere.

Maximum Borrowing

If you find that you are continually reaching the limit of your company overdraft, find yourself unable to borrow money, or your suppliers are refusing you credit, or you do not have sufficient assets to obtain a secured short-term loan, your business could be in trouble. Once you start regularly having to borrow money to pay creditors, pay your
staffs’ salaries or keep your business afloat, this suggests that your business could become insolvent. 

Creditors Issue a Winding Up Petition

If your creditors feel that you are not able to pay back your business debts, they can apply for a winding-up petition from the courts for compulsory liquidation. Creditors only need to be owed £750 to pursue this, but this is usually an expensive procedure so will often be a last resort only done if the creditors feel they won’t get paid any other way.

At this point, one of your options is to consult an insolvency practitioner for advice to halt the winding up petition. They will serve as a neutral party to find the best solution for your business and your creditors.