The Warning Signs of Insolvency

The Warning Signs of Insolvency

March 3, 2021 by Sandra

When it comes to finance, it’s easy to bury your head in the sand.

But with a business, recognising the warning signs of insolvency early could mean the difference between whether or not your business survives. Insolvency can sneak up on you fast – so the key to keeping your business solvent is to always be on the lookout for any clues of future trouble.

As one of the top insolvency practitioners in the UK, in this blog, we investigate the tell-tale signs of insolvency.

Why you need to act fast

The sooner you spot the warning signs of insolvency, the more time you will have to act and turn things around.

What’s more, if you continue to trade whilst insolvent, you not only risk expensive fines, but you could also be made personally responsible for company debts or could even face disqualification from directorship as a result. 

As one of the top insolvency practitioners in the UK, we are experts on insolvency and business turnaround solutions.

Over the years, we have helped hundreds of businesses on the brink of insolvency to turn things around – so, read on to discover what signs to look out for so you can make sure your business stays afloat…

Some of the biggest warning signs of insolvency include:

1. Insolvency test

If your business is facing difficulty and you are concerned that insolvency is on the cards, the two basic methods of assessing whether or not your company is insolvent are the balance sheet test and the cash flow test.

The balance sheet test looks at whether your company’s liabilities are greater than your assets, whilst the cash flow test determines whether you owe more money at any time than you can pay. 

However, insolvency is not an instant or immediate state, and it can take months or even years for a struggling business to become insolvent – which is why it is so important to look out for the early signs of insolvency in order to turn things around whilst you still can.

2. Cash flow 

Whilst company cash flow problems aren’t necessarily an indication of insolvency, it’s important to be mindful of your cash flow situation. There are a number of things that can cause cash flow problems, and sometimes these problems can just be temporary.

However, consistently lacking sufficient cash flow is one of the earliest warning signs of insolvency, which is why it’s so important to manage your cash flow on a daily basis so that you can keep on top of any issues. 

3. Late paying debtors

Late paying debtors are one of the earliest signs of future issues, especially if you have a small number of customers who account for a large proportion of your business.

If you find that you are picking up the phone frequently to chase outstanding invoices, it’s important to take action right away so that you can assess the knock-on effects of slow-paying debtors.

4. Mounting creditor pressure

Are you frequently late paying your suppliers and other creditors? Or perhaps you are waiting for the final demands to come through before settling up, thinking it will help to ease your cash flow woes?

Well, as useful as this practice might be for you, it actually raises flags with creditors who may refuse to supply you on account and become more aggressive with chasing payments – which is particularly bad news if your business requires stock from suppliers in order to trade. 

If you find that you are under mounting pressure from creditors and are struggling to keep up with late payments, it’s important to seek advice before it’s too late. 

5. Maximum borrowing

Is your overdraft always at the limit? Maybe your bank has refused an overdraft extension, or they have already given you notice of their intention to reduce your overdraft facility? If so, these are important signs that your bank has spotted potential problems and is trying to reduce their risk.

If your company regularly has to borrow money to pay creditors and staff wages, this is referred to as ceiling borrowing and can suggest that your company is on the brink of insolvency.

How McAlister & Co can help

If you think that your business is experiencing some of these warning signs, it’s important that you act now. McAlister & Co are one of the top insolvency practitioners in the UK and we are always on hand to offer no-obligation advice to businesses of all sizes.

Sometimes, an informal chat about your concerns and the options available to you is all you need to turn things around – and if not, our expert team will be there to help you, whatever your individual needs. 

From company voluntary arrangements and pre-pack administration to creditors’ voluntary liquidation and more, contact top insolvency practitioners in the UK McAlister & Co today to find out how we can help you to rescue your business.

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