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Signs of insolvency – when to seek advice


20 October 2015: It is often remarked that the insolvency profession would do more “rescue” work if directors sought advice earlier, i.e. before a formal insolvency procedure is the only available option.  Experience shows us that it can be difficult for a director to decide when, if at all, to seek insolvency advice. A mixture of embarrassment, together with the perception that seeking insolvency advice is essentially akin to admitting failure, can prevent business owners seeking the right advice at the right time.  However, it is important for directors to be able to spot warning signs that a company may be approaching insolvency and act swiftly.

The earlier advice is sought, the more likely that rescue options can be explored with a view to avoiding a formal insolvency process.

Below are five indicators of impending insolvency; the list is by no means exhaustive, but can be helpful for anyone running a company to consider.

Creditor pressure

Increased demands from creditors could indicate that the company is unable to pay its debts as they fall due. When a company is consistently late in making payments to its creditors, this is a sign that problems may be looming and this may lead to CCJs or even a petition for the company to be wound up.

Balance sheet blues

It is important that a director reviews not only the year end accounts, but also management accounts at regular intervals throughout the year. Understanding how the business is performing is key to being able to identify potential insolvency at the earliest possible opportunity.  If the balance sheet indicates that the company’s assets are only just more than or the same as its liabilities this could be a sign of trouble.

Personal payments

If a director is increasingly having to put personal monies into the company, or sacrifice taking a salary, to fund expenses such as employee wages, taxes, rent and supplier payments, it may be time to revisit the company’s cash flow forecasts to identify whether these trends are temporary or unlikely to change.

Problems with obtaining credit

When a company has reached the limit on its existing credit facilities, it may be finding it increasingly difficult to obtain further credit.  In these situations, it is not uncommon to find that the only facilities available to the company are those offered at very high interest rates.  Before taking on an unaffordable debt burden which would ultimately make the company’s financial position much worse, directors should consider whether they are in a position to honour such loan agreements.

Late payments from debtors

Unsurprisingly, cash flow problems can be caused or worsened by a company’s own customers who consistently fail to adhere to the company’s payment terms.  When anticipated funds are not received, this will obviously have an impact on the company’s ability to pay its own creditors.

The management team at BRI brings together a wealth of technical knowledge and experience with a network of professional contacts. If you or any of your clients are currently being affected by any of the issues above, contact us to explore the options available.