Can a profitable business become insolvent? Yes, it absolutely can - and it can actually happen more easily than you might think.
When disaster strikes, a once profitable business can go from stable to insolvent in very little time at all. In fact, insolvency can seem to come from nowhere - one day your business is profitable and healthy, and the next, insolvency is looming on the horizon.
There are a number of issues that can lead to insolvency, from losing an important customer to increased competition and even a cash flow crisis. As a director, the most important thing is to be aware of these issues so that you can spot them on the horizon and act before it’s too late.
So, read on to discover nine commons issues that can lead to insolvency - and discover how McAlister & Co can help you take back control!
9 issues that lead to insolvency
1. Poor cash flow management
We’ve said it before and we’ll say it again - when it comes to running a successful business, cash flow is king. Not only is poor cash flow in general a sign of looming insolvency, but if you don’t properly manage your cash flow, any large, unforeseen expenses such as a tax bill or large purchase could tip you over the edge.
If you’re struggling to manage your cash flow, discover how to take back control and solve your cash flow problems in this blog.
2. Clients not paying on time
But it’s not just about you managing your cash flow successfully. If your customers make late payments, it can start a chain reaction of events that could ultimately hold up your entire company.
Of course, one or two late payments here or there isn’t a problem, especially if you are in control of your cash flow and are prepared for such occurrences - but regularly not getting paid on time can have a significant effect on the health of your business.
3. Depending on credit
Is your business overly dependent on credit? Whilst many businesses need credit in order to successfully grow, there’s a fine line to be crossed.
Whereas healthy businesses tend to use a combination of cash and credit to keep things moving forward, if you are depending too much on credit or are spending large amounts on repaying credit, your lenders will start to notice.
And when lenders notice you are relying too much on credit, they could even place a limit on the credit available - which could be the thing that tips your business over the edge and into insolvency.
4. Struggling to pay taxes
Can your company afford to pay VAT, PAYE, and other important taxes? Paying tax is an incredibly important part of running a business, and healthy businesses always ensure that they have enough cash available to pay taxes wish they are due.
Although HMRC have arrangements available to help you pay, generally speaking, if you’re struggling to pay your tax on time, it could lead to a series of severe financial problems further down the line.
5. Not keeping accurate records
Do you know how much your company earned in the last quarter? What about your costs for the last quarter? Or even the amount of products or services you deliver on a daily basis?
Keeping regular and detailed records is one of the most important aspects of running a business and is absolutely essential if you’re going to remain in control of your company’s finances and understand and plan for what’s on the horizon.
Not doing so means any bumps in the road could take you by surprise and result in financial wrong turns - so it’s really important to keep useful and accurate records so you know where you are at all times.
6. Relying too much on one customer
How many customers do you have? Does 80% of your revenue come from 20% of your customers? And could losing one customer ultimately destroy your business?
Relying too much on one customer can put your business is a dangerous position and lead to serious risk of insolvency if that customer is lost, which is why if your business is going to remain healthy, you need a diverse range of customers.
7. New competition
New businesses enter the market all the time - and a lot of the time, competition can be a good thing because it challenges you to make your business better and gives you the drive you need to work hard.
However, it’s really important to keep a close eye on competitors in order to avoid a loss of market share which could in turn lead to a loss in profit - and make sure you focus on retaining your existing loyal customers too to make sure you always have a safety net even if the competition increases.
8. Taking money out of the business
When things are going well, it’s natural to relax slightly and take slightly more money out of the business for you and your family to enjoy - after all, you deserve a reward for all of your hard work!
However, taking too much money out of your business is a sure-fire way to drive it towards insolvency. Whether you are hit with an unforeseen tax bill or one of your biggest customers is late paying, hazardous situations are much easier to deal with if your business has plenty of money in the bank.
9. Burying your head in the sand
Finally, one of the most common issues that we see all too often is business owners and directors burying their head in the sand rather than facing up to any financial difficulties.
Yes, financial hardship is stressful, and it can be tempting just to turn a blind eye to your problems and hope that they go away. However, more often than not, the more you ignore a problem, the bigger it will get - which is why it’s so important to face your financial challenges before it’s too late.
What to do if your business becomes insolvent
Whether your business is experiencing the early warning signs of insolvency or has already become insolvent, McAlister & Co are here to help.
As business rescue and turnaround specialists, we are always on hand to provide advice and help you find the best solution for your business, whether you decide to turn things around with a company voluntary arrangement or ultimately decide to close the doors and walk away.
Remember, the sooner you seek advice, the better - so be sure to contact our expert team today.
