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Insolvency - How to spot the warning signs

Every year, more and more companies are facing the prospect of administration, liquidation or closure because their business has become insolvent. In most cases, the warning signs of insolvency usually present themselves early on, but directors and management focused on the day to day running of the business can easily miss the first signs of trouble.

Accepting that your business is insolvent can be difficult, but acknowledging the situation from the start is the first step to recovery. Waiting and hoping that the situation will resolve itself will only lead to further problems and a reduced chance of resolution.

Is your Business Insolvent?

There are two clear definitions to test whether or not you are insolvent, they are:

• Do your liabilities exceed your assets?
• Are you unable to pay all of your debts as they fall due?

If the answer is yes to either of these questions, then you need to take advice early on from a licensed insolvency practitioner who will advise on the options available for recovering your business. If saving the business in its current form is no longer feasible, insolvency practitioners can still advise you on the advantages and disadvantages of liquidation, administration and voluntary arrangements.

The majority of businesses realise that they have financial problems or are facing insolvency when:

• They are constantly being chased by suppliers for payment of debt
• They receive final demands from suppliers

The cause of the problems may be down to trading losses or cash flow issues.

Creditor and Debtor Cash Flow

Cash flow is perhaps the biggest warning sign that your business is approaching insolvency or, at worst, already insolvent. Put simply, if you are unable to make payments on time or for the amount due, then there are cash flow problems that need to be addressed. Red flags highlighting cash flow issues include:

• Being unable to place orders due to unpaid debts
• Being refused new credit
• Daily calls requesting or demanding payment
• Creditors threatening legal action

If cash flow problems are not resolved quickly, it can lead to your business being forced into insolvency by creditors. If this happens, the business can be put into liquidation and an insolvency practitioner will be appointed to run the affairs of the business. In this instance, the objective for the insolvency practitioner is to sell off your business assets and pay back the creditors. It is always better to act as soon as possible and not be pushed into liquidation by your suppliers, as this can have negative consequences for the directors.

Receiving daily calls from creditors or being refused credit should immediately signal the business is in trouble and that preventative steps need to be taken.

Spotting the Warning Signs

In order for your business to continue to operate, cash flow needs to be managed efficiently, if not, problems can quickly arise.

Payments from your debtors that are not being regulated and managed correctly can lead to late arrears, which in turn can result in the business being unable to pay its own creditors. If you are not being paid on time, then it is likely you will not be able to pay your creditors on time either.

Signs that cash flow is not being managed correctly include:

• Debtors not paying their bills on time
• A high level of credit notes being issued
• No clear structure for prioritising/authorising payments
• Incurring late payment penalties

By simply addressing these issues when they arise can be all that is required to turn the business around.

Catching Insolvency Early

Insolvency can happen very quickly, but by recognising the warning signs and taking preventative action as soon as possible - your business could be saved.

If you think your company is heading towards insolvency or may already be insolvent, now is the time to seek advice from licensed insolvency practitioners who will be able to advice you on the correct course of action required in order to rescue your business.

About Kirks Insolvency

Based in the South West, Kirks Insolvency led by David Kirk is a firm of licensed insolvency practitioners and chartered accountants. Kirks Insolvency has with over 20 years of experience helping thousands of businesses to steer a route through their financial problems.

This was posted in Bdaily's Members' News section by David Kirk .