Warning Signs of a Struggling or Insolvent Business

Ok, I am worried. What are the warning signs that my business is in trouble?

Warning signs of a struggling business

If you recognise too many of the following signs, then it is likely that your business is under pressure, at risk, or it could be be insolvent.

Signs regarding the bank

• Your overdraft is always at the limit
• Your bank always request more information
• Your bank has refused to increase your overdraft
• Your bank refuses to provide a Loan
• Your bank has refused to provide an Enterprise Financial Guarantee loan
• Your bank has asked for facilities to be reduced
• Your bank wants to introduce investigating accountants
• Your bank wants personal guarantees
• Your bank asks for increased security and/or personal guarantees

Signs relating to reporting

• You have not filed the company’s accounts on time at Companies House and have incurred a penalty.
• You have not filed the company’s annual return at Companies House.

Warning signs relating to Creditors

• Cash flow is always tight so paying creditors is difficult.
• You cannot get stock because you struggle to pay creditors on time and/or miss deadlines to pay suppliers.
• You cannot get new credit or extend existing credit.
• The company’s creditor days is growing – i.e. divide the amount of money you owe creditors by the sales per annum and multiply by 365.
• You fail to meet agreed payment terms and deals with creditors.
• You have lots of red warning letters and legal actions.
• You are “Peter & Pauling” – using lots of suppliers and spreading credit around.
• You are  having to handle creditors calls every day.
• Your suppliers can obtain trade insurance against your company.
• You have had visits by Sheriffs or bailiffs.
• You are experiencing HMRC payment problems.

Signs from Debtors

• Debtors do not pay on time.
• You are unsure what your total debtors are.
• Debtor days are over 85 days: (divide the amount of money you are owed by debtors by the sales per annum multiplied by 365).
• Your company has concentration in 1 or 2 major customers (debtors).
• Your accounts department only invoices periodically. You do not have a dedicated debtor collection function.
• You don’t want to issue too many credit notes – although you know the goods supplied have been faulty, returned or under agreed quality.

Signs from Factoring Companies

• You do not know how much is owed to you and how much the company owes the factor.
• Your factoring company is reducing your advance or not offering advance against your invoices.
• They are advancing 75% against my invoices, but disallowing lots of invoices.
• They are too expensive.
• They claw money back from me after the debtor has not paid in less than 90 days.

Management Warning Signs

• Functioning with an autocratic leadership- is it one person running the show?
• The management team cannot perform because of:
  • Firefighting – you never get your work done;
  • Lack of information or wrong information;
  • Concentrating on non essential issues;
  • Senior people seem paralysed into inaction.
  • Are you “compartmentalising” problems. i.e. you deal with one creditor problem and ignore others.
• You blame others (This being anyone and everyone! Including debtors, accountants, advisors, creditors, the bank…)
• You do not have a business plan.
• You do not have regular management meetings or board meetings.
• You dislike changes.
• Directors are taking big salaries and expenses.
• You ignore advice of others and professionals.
• You have an overdrawn directors current account

You and the management are unaware of

• An accurate Gross Profit
• Accurate costs
• Sales per month / per annum.
• Orders taken.
• Enquiries quoted for.
• Bank balances.
• Where 80% of work comes from.
• Where 80% of profit comes from.
• Your market i.e. your competitors, products and threats.
• Your key business statistics:
  • How many units of your product do you make per day? And at what cost?
  • How many units are needed for you to break even?
  • How many enquiries do you need?
  • How many enquiries do you convert into sales?
  • How many people are involved in production?
  • What is your sales performance compared to last year? last month? your budget?
  • What are your cost increases/decreases, year on year?
  • How many new customers have you gained/lost this year? Why is this?

PAYE (HMRC)

• You are not paying deductions on 19th of the following month.
• You have not filed monthly returns or paid the tax deducted.
• You have had penalties.
• You have entered into deals with the Revenue and cannot keep up with them
• You are well behind with tax paperwork – this is a failure to maintain a PAYE Scheme.
• Taxes and other social security entry on audited accounts seems high.
• Tax Collectors are pressing.
• Debt recovery unit are dealing with the account.

VAT (HMRC)

• Not filing returns or paying tax when payments fall due
• Had VAT surcharges.
• Doing deals over time with the local VAT office as you cannot keep up with the deals.
• Cashflow says you can repay far more than profits made.
• Debt recovery unit pressing.
• I’m not that bothered about the VAT!!

These HMRC warning signs are based upon their minimum compliance expectations: if you breach these then they will see the business as insolvent!

Yourself

• You feel that you are the only person who can make a decision in the business.
• You cannot stand going into work on a Monday.
• You breathe a sigh of relief when Friday night comes.
• You don’t open your post.
• You don’t take calls from irate creditors.
• You dread the bank calling.
• You cannot sleep.
• You are falling out with those around you: at home; at work.
• You are very lonely at work.

Systems Warnings Signs:

• You don’t produce monthly management accounts.
• Sage or similar computerised accounts packages show a negative balance in liabilities.
• You have a computer generated profit and loss but a handwritten balance sheet.
• Wastage understated.
• Constant returns, faults and disputes with debtors.
• You ignore the information the systems produce as “it must be wrong” !

The Workforce:

• High staff and management turnover.
• Internal political issues causing difficulties.
• A demoralised, unmotivated team.

Signs regarding Finance:

• You are always refinancing assets.
• You have no money to pay deposits.
• Just need x,000 to sort this problem. The next big sale/contract/debtor payment will sort the problem out!
• You have introduced a number of new financial products to keep going.
• You have borrowed money against your home to fund the business.
• You are not taking money out of the business to live.
• You have used your own money to pay wages and bills and are just waiting for the next big sales to pay it back.

So, now you have read through these signs, print off this page and tick all of those that apply. If you get an uncomfortable feeling that these warning signs are too familiar and it is suggesting you company is in trouble , follow the links to the guides on this site, to provide you with helpful steps and advice you can take.

Top Tip: A key page to read, if you are concerned is, Is My Company Insolvent?. Here you can find three key tests, the cash flow test, balance sheet test and legal action test, to help you assess your company’s situation and review any signs of insolvency.

Contact us for help and assistance with recognising these warning signs and acting on them.