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Failing to Spot Signs of Insolvency Could Lead to Your Downfall

Failing to Spot Signs of Insolvency Could Lead to Your Downfall

Alongside the daily management of your business, from securing new orders, marketing to customers, and navigating the service delivery process with suppliers, as a company director, it’s your legal duty to prepare and file the accounting records of the business, or seek the services of an accountant to complete this task. Maintaining monetary records accurately and refreshing those records often can help provide a window into the financial health of the business. If your business is veering off track, analyzing the company balance sheet and cash flow should indicate if the business is experiencing minor problems or serious financial distress.

As with personal health, if a disease is caught early, it can be controlled or even eradicated before the full force attack. The same goes for the financial health of a business. If the red flags are identified before the business falls into debt and is no longer able to fulfill its operational purpose, company liquidation can be avoided. In this article, we will run through how to prevent the demise of your business by proactively searching for signs of financial struggle.

An Early Diagnosis Can Prevent Large-Scale Failure

To be able to identify poor financial health and distinguish between short-term and long-term struggle, you must understand what signs to look out for. Spotting trouble before it arrives at your doorstep will increase your chances of recovery. On the other hand, if your business has incurred debts that are greater than your ability to repay the, the damage caused may be irreparable without action from a licensed insolvency practitioner or business rescue expert.

Signs Your Business Is Experiencing Serious Financial Distress

If your business is experiencing financial difficulty, you may sporadically miss payments, take advantage of payment holidays, and conduct a cutback on daily expenses to reduce outgoings. If your business is insolvent, liabilities may outweigh assets, company cash flow may be nil or close to, and you may default on payments due to lack of capital. Smaller-scale financial distress may be remedied with a fast cash injection; however, an insolvent business would need firmer treatment to survive.

Carrying out a cash flow and balance sheet test for insolvency will determine if your business is strong enough to weather the storm or if it is no longer able to continue trading due to insolvency. The cash flow test will also assess if the business has enough funds to fulfill everyday liabilities, such as supplier payments, rent, employee wages, and stock replenishment, and will assess the value of company assets, such as stock, petty cash, equipment, and machinery. This will then be measured against liabilities, which are outstanding debts to creditors, such as, lenders, banks and trade creditors.

If your liabilities outweigh your assets – your business will need urgent support to rebalance the scales. If your business can be saved, there are rescue measures available such as a Time to Pay Arrangement which will allow you to restructure tax liabilities to allow for more breathing space. If your chances of survival are extinguished, you will need to explore company rescue or even closure routes.

Operating in the Interest of Creditors

As a company director, you’re legally obliged to check that your business is functioning responsibly, with means calling in a licensed insolvency practitioner if your business is struggling financially. In addition to driving your business to success, it is your core duty to work in the best interest of creditors.

If you have doubts over the viability of your business, continuing to trade could worsen the financial position of creditors, putting you in the firing line of an Insolvency Service investigation into director misconduct which could result in director disqualification. Failure to protect creditor interests could land you in further hot water if you continue to trade while your business is knowingly insolvent.

It is natural for the financial position of businesses to fluctuate as this will be influenced by a whole host of factors, such as customer demand, harsh trading conditions, competitor activity, and marketing messages. It is part and parcel of the growth process, however, failing to distinguish between a one-off hiccup and repetitive cash flow imbalances could result in your finances to tumble downwards. A licensed insolvency practitioner will be able to explore every effort to rescue your business as there are support measures which can ease financial pressure and open the door to negotiating with creditors for fast-tracked business recovery.


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by Jonathan Munnery // Jon Munnery is a partner at UK Liquidators, UK's largest company liquidation service made up of licensed insolvency practitioners and business rescue experts. Jonathan regularly provides advice to company directors approaching insolvency, including those who are already insolvent.

Opinions expressed by contributors are their own.