Insolvency is easily defined: It means that your organisation’s debts outweigh its assets, or that you are unable to pay your bills when they are due.
That’s an obvious enough thing to notice and fix, right?
Well, not necessarily.
Not only is your business a complex affair to manage, but you might be too close to see the warning signs coming.
Apart from the two major red flags, there are, thankfully, a number of other early indicators that should ring alarm bells that your company is on its way to insolvency.
If you act in time, you can still save your business; you can call in insolvency practitioners who can, in a lot of cases, help you to manage the situation and find a long-term solution to lead your company to prosperity again.
To help you decide if you need to seek advice, we have come up with a handy list of things to look out for that could indicate that all is not as it should be.
Cash flow crisis
Is cash flow becoming a problem? Are you spending more than your company is earning?
Repeatedly feeling the pinch in terms of cash flow is a sure sign that things are heading down an undesirable path.
You could be running the risk of not being able to pay bills on time, to the extent where suppliers might issue winding up petitions, which almost always spell the end for trading.
You can try to nip this in the bud and avoid it becoming a problem by looking at your invoice processing and payment terms. Is the process efficient enough? Are you too soft with your debtors?
Make sure you do something about late payments from your clients. There should be a penalty if deadlines are not met. If a payment is very overdue, don’t rule out legal action. If there is no incentive to pay on time, why would they?
Running cost conundrums
Do you find yourself dangerously close to your costs exceeding your income? If so, this is also a sign that insolvency might soon be on the cards.
If you are looking at a situation whereby you are finding it increasingly hard to cover your operation costs, you need to act to remedy this.
Staffing costs and other overheads are a good starting point. Could you use contractors and freelancers instead of making a long-term financial commitment? Could you temporarily freeze recruitment and promotions?
Do you have too much stock that you are needlessly storing? Could you streamline this and look into selling some off to give you an instant cash injection?
Are your premises too big? Maybe think about looking at, smaller, cheaper alternatives.
Balance sheet blues
What are your profit margins like? Are they in decline?
Even if you think you have a healthy turnover, non-existent profit margins could mean you are heading for a serious fall.
Your insolvency radar should kick in if your margins are consistently dwindling.
If they become really narrow, it doesn’t take much to tip a company into liquidation.
A slight adjustment in interest rates could see you off, as could sudden, unexpected staff absence.
Supply chain grief
Have you noticed a sudden lack of confidence from your suppliers? If so, you could be headed for trouble.
Perhaps your suppliers have suddenly taken out trade credit insurance, or maybe you are receiving strongly worded demands for payment.
If you are increasingly finding yourself unable to pay on time, or if you are frequently requesting renegotiation of payment terms, alarm bells should ring.
If things get really bad, you could be issued with a winding up petition. If this happens it’s a sure sign that things have got serious.
Although creditors only need to be owed a relatively small amount to pursue this avenue, they will only resort to this kind of action if they really believe there is no other way to get their money.
It is an expensive process, so it should really have you worried if it happens. You really do need to be consulting an expert in this case so that you can see if there is a way to stop it in its tracks and save your business.
If you have a keen eye for the warning signs, it shouldn’t come to this, but if you’re not sure whether or not your company is headed for insolvency, it might be time to speak to a professional advisor.