When you are heavily involved in the day-to-day running of business, it is all too easy to miss the warning signs that the company is either becoming or is already, insolvent. You may feel like you are simply in the midst of a short-term cash-flow shortfall, the sort of which you have no doubt experienced before, but the situation could be much more serious.
One aspect of insolvency that surprises so many company directors is just how quickly it can sneak up on you. You’ll be aware that you are experiencing some problems paying your debts, but there is a definite line between being in debt and being insolvent. This is a position that, as a company director, you must keep a careful eye on. As soon as the company becomes insolvent, you must act to maximise the creditors’ interests. Failure to do so could ultimately lead to personality liability for the company’s debts.
These are a few of the common warnings signs of an insolvent business. If you recognise one or more of these problems in your business, you should seek professional help immediately.
Banks refusing further borrowing
If your company is consistently at the outer reaches of the lending facilities available and is being refused credit by suppliers, insolvency may not be far away. Maxing out your company overdraft, credit card and not being able to access further lending without providing a personal guarantee is known as ceiling borrowing, and is often a sign of serious financial problems.
Creditors Sending payment demands
If you regularly receive payment demands from creditors such as suppliers or HMRC, then your company is clearly struggling with its debts. The first sign of a problem is likely to be increasing creditor days i.e. it takes longer and longer to pay your bills. This can quickly turn into payment demands, threats of legal action, statutory demands and ultimately a petition from a creditor to wind up the company. If HMRC is chasing you for payment, then the situation becomes even more precarious, as penalties for late payment of tax can be substantial. This makes a bad situation even worse.
Can’t pay staff wages
If you are struggling to pay your wage bill at the end of the month, this is a sure sign that insolvency is not far away. If your employee’s wages go unpaid, then you are already technically insolvent.
Director Not Taking Salary
When a company’s financial situation is so bad that company directors are not being paid, this is a clear sign of serious underlying problems. You may be hoping that the next big sale will improve the situation, but such problems are rarely so easily resolved.
Customers Don’t Pay on time
One of the biggest causes of financial problems for SMEs is customers that do not pay their bills on time. If your debtors are not making payments as they should, it’s likely you’ll experience cash-flow problems that will make it difficult for you to pay your creditors. In general terms, a high proportion of late payments is a good indicator that your collection procedures are insufficient.
Constantly dealing with problems
If you are spending most of your time ‘fire fighting’ and preventing problems from escalating, rather than focusing on the day-to-day activities of your business, you need to take a serious look at the overall health of your business. Simply going from one problem to the next is a strong indicator that your business is struggling.
No reliable management information
A lack of reliable business data can make it difficult to pinpoint the source of the problem and work to improve the company’s fortunes. When reliable cash-flow forecasts, aged debtor reports and sales forecasts are not available, it severely limits your understanding of the situation and your ability to deal with it.
No collections system in place
With no formal collections procedures in place, it can mean that staff are not chasing payments as they should be. If there’s no set policy on when to apply strict credit limits and no warnings to customers that interest will be claimed on late payments, your business is not operating on solid foundations.
If you are experiencing one or more of the symptoms above, you need to act quickly to prevent your financial problems from escalating. It may be that you are already insolvent. For a free, no-obligation discussion of your circumstances with an expert, please call 08000 746 757 or email: firstname.lastname@example.org today.