With UK insolvencies on the rise, many businesses are struggling to navigate the challenges of the current economic climate. High inflation has driven up prices while driving down sales, as customers weather the cost of living crisis. Business operations are suffering too, with supply chain disruptions, a reduced labour market and extended sales times creating an extra strain.
This multitude of issues has left business owners and directors fighting on several fronts and managing as best they can. But being in the centre of such a rocky period rarely benefits objectiveness and insight. This is why, for many owner managers, business distress can creep in and only become distinct too far down the line.
In this article, we take a look at the early warning signs of business insolvency. Recognising these signs can enable business owners and directors to seek advice in the early stages, when business recovery and turnaround options are still available.
The common signs of business distress
1. The sales pipeline
Business distress is often first revealed through challenges in the sales pipeline.
This might include:
- Extended sales time
- An increase in costs
- A reduction in demand
- The loss of clients or suppliers, often through closure.
2. Cash flow
With a business’s sales pipeline under strain, cash flow will be affected. This is likely to lead to a business being unable to pay its liabilities when they fall due, which is the first clear sign of insolvency
Poor cash flow can look like:
- An increased debt burden, leaving the business operating month-to-month and with fewer options for repayment
- HMRC tax arrears
- Continual late payments, to suppliers and from customers, which then affect business operations
- Potential creditor disputes that could lead to the issuing of a Winding Up Petition.
3. Financing issues
With a business’s cash reduced, financial issues will arise. A business may increase their liabilities and reduce assets to cover day-to-day running costs, which can lead to a negative balance sheet – the second clear indicator of insolvency.
Such financing issues may look like:
- Rising borrowing to cover basic costs
- The sale or refinancing of assets to cover debt
- Accounts that are submitted late
- An abandonment of forecasting
- A negative balance sheet
4. Staff / HR
As the distress of the business intensifies, internal structures and communication may breakdown, which can lead to internal disputes and poor operational functions.
Signs of staffing and HR issues may look like:
- Communication breakdown between management, staff and key stakeholders
- Budgetary constraints, which stretch existing resources
- The loss of key staff, which result in a skills shortages and greater expense in new hiring and training
- Increased absenteeism as staff become demotivated and experience personal financial pressures.
Finding a route forward to avoid insolvency
By this point, a business is facing significant operational and financial challenges that, with time, are likely to lead to closing the business.
Thankfully, if the signs of insolvency are noticed and acted upon early enough, there is a good chance that business rescue measures, such as restructuring, debt management and raising finance, can be implemented to save the business.
How we can help
We have extensive experience advising business owners and directors, and we will always work with you to find the best solution for you and your business.
One of our Partners would be more than happy to have a non-obligatory confidential chat with you. We can be contacted at rescue@opusllp.com or call us on 020 3326 6454 and we will arrange for a call with one of our Partners.