For accountants and business advisors, a client’s numbers are more than figures, they’re a live read on the health of a business and often the wellbeing of the person behind it. Long before a director voices concern, the warning signs are already in the data. You see what they can’t: the smoke before the fire.
When financial pressure builds, fear and denial often take hold. By combining financial insight with an understanding of human behaviour, you can help clients face reality early before pressure turns into crisis. At BRI Business Recovery and Insolvency, our team are here to help. If you are in any doubt over any of the following, then please contact our team today.
Early Signs of Financial Distress that Could Lead to Insolvency
At BRI we know the pressure that accountants are sometimes under and how supporting your clients is key. If you’re concerned about a client and want to know more about the early signs of financial distress then make sure you reach out to our team.
Here are five critical red flags where financial distress and human strain intersect:
1. Chronic HMRC Debt Management
An obvious but frequently misdiagnosed sign is of deep financial distress is when a business is using HMRC as a recurring informal overdraft due to temporary cash flow issue. Repeated Time to Pay arrangements, missed VAT, or PAYE delays signal deeper problems.
Behaviourally, this often shows up as avoidance when clients are missing calls, delayed in providing records, or uncharacteristically being defensive when pushed on this point. When statutory pressure mounts, burying the issue can feel easier than confronting it.
2. Deteriorating Creditor Relationships
Watch for creditors being stretched from 30 to 60 or 90 days. This erodes supplier trust and creates operational risk. It’s all well good have prospective opportunities just around the corners to help with cashflow pressures, but if a key supplier unexpected puts a stop on an account then a business may be able to pivot in time to deliver the product to complete the sale.
You’ll often hear it in tone as well as numbers: reliable directors may suddenly describe suppliers as “difficult” or “unreasonable.” In reality, they’re firefighting and absorbing pressure of disgruntled suppliers seeking payment when managing cash squeeze in running the business.
3. Irregular Director Loan Account (DLA) Activity
Look closely at the DLA for irregular activity, as desperate times breeds desperate measures. An overdrawn DLA may indicate a director relying on company funds to sustain personal commitments. Conversely, large, erratic injections of personal funds could suggest an emotional attempt to keep the business afloat. We have seen and heard stories from directors explain how their short-term survival decisions were driven by loyalty to staff or identity tied to the business. Unfortunately, this impairs long term judgement that can result in actions such as remortgage their home, drain savings or taking out personal funding solution.
4. Over-Reliance on Short-Term, High-Cost Funding
A shift toward merchant cash advances, expensive factoring, or short-term loans signals a business in reactive mode. These solutions may solve today’s problem while worsening tomorrow’s. If you notice soaring lending fees or short-term bridging loans on the creditors list, this is a potential signal that the businesses health needs to revisited and cashflow forecasts revisited.
It’s understandable for directors to view these types of funding options as a “temporary fix”, but it comes with a heavy price tag both financially and mentally. This is often a sign of financial distress in disguise because it is masked with the passion for the business. But if the servicing of this debt is not correctly planned, then a business could unexpectedly find itself in a dangerous cycle of constantly chasing the next cash injection and increasing the likelihood of accepting unsustainable funding terms that carries significant personal financial risk with the lenders terms and conditions.
5. Declining Gross Profit Margins
Rising turnover alongside shrinking margins is a critical structural warning. Costs are rising, but prices aren’t keeping pace. Directors often point to strong sales as reassurance, clinging to activity as proof of success. It takes a steady, empathetic hand to show that being busy without margin is both financially and emotionally unsustainable.
This is another sign of financial distress that is often missed from the outside. With rising costs, passionate directors don’t want their customers or clients to miss out. But if the compassion for the clients is causing declining margins, then it may be time for you to step in.
The Accountant’s Next Step When Suspecting Signs of Financial Distress
When you spot these signs of financial distress, time is the most valuable asset. Early intervention and having that difficult conversation might be what makes all the difference. Positioning yourself as an advocate, not just an adviser, allows you to guide clients toward identifying potential solutions. Handled well, this isn’t just about rescue, it strengthens trust, protects the client relationship, and reinforces your role at the centre of their decision-making when it matters most.
If, however, the problem appears too great and you require some independent and conflict-free recovery specialist’s support, the team at BRI Business Recovery and Insolvency are here to help. We can explore informal and formal solutions that can give the business a welcome breathing space whilst at the same time relieving immediate personal strain. Reach out to us today.