A client’s cash position rarely collapses overnight. More often, the warning signs build gradually: the payment run is being sequenced by whoever chased hardest that week, suppliers are waiting longer, and the cash flow warning signs of insolvency are sitting quietly in the management accounts you already produce every month.
The challenge is knowing when a difficult quarter has become something more serious. Raise the issue too early and you risk straining a relationship you have spent years building. Raise it too late and you risk becoming part of the story. We work alongside accountants on exactly that question, and we are always happy to take the call.
Why Cash Flow Warning Signs Go Unnoticed
Management accounts tell you how the business has performed over a given period. They typically report revenue, profit, margins and elements of working capital, but they do not necessarily tell you whether the company can pay its debts as they fall due. A business can be profitable on paper yet still experience cash flow difficulties that prevents it meeting its obligations when payment is required.
That is the distinction that matters when assessing insolvency. Under section 123(1) of the Insolvency Act 1986, a company is deemed unable to pay its debts if it cannot pay them as they fall due. Section 123(2) provides a separate balance sheet test, whereby a company is considered insolvent if value of the company’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities. A company can satisfy one test and fail the other, therefore be deemed insolvent. That is why cash flow needs to be considered on its own terms.
Distress can also look a lot like ordinary trading conditions. Recent Sage research into UK late payment found 49% of invoices issued by small businesses were overdue. When everyone is under pressure, a stretched debtor book can look unremarkable. But if a client’s numbers are giving you pause, our corporate insolvency team would rather hear from you early.
How to Tell If Cash Flow Issues Are Serious
These are the signals we see in management information long before anyone uses the word insolvency.
Debtor days drifting upward quarter on quarter. One poor month may be noise. A trend across three suggests the working capital cycle is lengthening, and that is often where the first signs appear.
A cash conversion cycle that keeps stretching. The company is funding its customers for longer each month, without a corresponding increase in the cash available to it.
Payment runs sequenced by pressure rather than due date. When payment order is determined by who chased hardest, cash is already being rationed. VAT and PAYE often slip first, because HMRC do not telephone weekly.
The same invoice appearing in three consecutive ageing reports. It is not disputed, just unpaid. Holding one supplier back quietly is a decision, and those decisions are rarely isolated.
A cash runway measured in weeks. If payroll could not be met from committed receipts for a full quarter, you are seeing the cash flow test play out in practice.
If two or three of these ring true, that is the point at which a conversation with an insolvency practitioner becomes useful, not the point at which it has become too late.
What to Do About Cash Flow Warning Signs
The practical next step is narrower than most people expect, and you are well placed to take it.
Build a short-term cash flow forecast. Use the direct method, listing expected receipts and payments rather than extrapolating the profit and loss. It is a standard short-term liquidity tool in restructuring work, and the first document a licensed insolvency practitioner will usually want to see when exploring the various alternative options to a formal insolvency process.
Stress test it. Model the largest customer paying 30 days late, or a facility not being renewed. If a realistic scenario takes the company below zero, you have identified the pressure point without needing anyone’s opinion.
Put the position to the board in writing. Once insolvency becomes probable, creditor interests enter the directors’ decision-making. A clear record of when the board was informed helps protect them, and you.
Bring in a licensed practitioner while options remain open. Restructuring, a company voluntary arrangement, or negotiated creditor terms may all be available at this stage, and many situations never require a formal procedure. That is where we come in.
How BRI Helps Accountants Advise Clients Facing Insolvency
Much of our work reaches us through accountants who have spotted something early and want a second view before raising it with a client. Sometimes that conversation ends in a formal procedure. Often it does not. The positive outcome might instead be negotiated creditor terms, identify cost cutting measures, or an introduction to funding that keeps the business trading.
You keep the relationship throughout, because insolvency is never just about the numbers.
If you have questions about a client’s position, or simply want some support, then contact our team today. There is no initial charge for doing so. The conversation is confidential and without obligation.