5 Signs your Business could be at Risk of Insolvency

We don’t want to be the bearer of bad news, but most small businesses are just a few late payments or a lost customer or two away from an adverse financial situation. While small businesses benefit from being agile and creative, they often lack the reserves to tap into should they experience a cash-flow shortfall. The result, unfortunately, can be insolvency.

There are two widely used tests for corporate insolvency:

  • The cash flow test – If your business is unable to pay its bills when they’re due, that’s a clear sign it’s in a precarious position. If there’s no indication that this situation will be resolved in the near future i.e. a substantial payment from a customer is due, then your business could be insolvent.
  • The balance sheet test – If the value of the business’s assets is less than its liabilities, taking into account contingent and prospective liabilities, then it could be insolvent.

If your business is deemed to be insolvent then a number of the potential strategies you could use to improve your financial situation are no longer available to you. For that reason, it’s essential you are able to recognise the warning signs that your business is nearing insolvency before it’s too late. Here are five signs you should look out for…

You’re facing mounting credit pressure

One of the most common signs that your small business is starting to struggle is an increase in the number of payment reminders and demands you receive from your creditors. Small businesses are facing a late payment epidemic. Having no doubt been on the receiving end of numerous late payments, you’ll know that it’s not always indicative of impending financial problems. However, if you have a number of creditors chasing debts you are unable to pay, particularly if HMRC is among those creditors, you could soon face legal action that will ultimately put you out of business.

You’ve maxed out your finance streams

Short-term finance streams like business credit cards and overdrafts can provide a valuable buffer for small businesses. But relying on credit too heavily could be a sign that all is not well in your business. If you reach your borrowing limit without providing a personal guarantee or have been refused credit by a lender or a supplier, you might soon struggle to pay your staff and your bills.  

You’re constantly fighting fires

If your working days are spent moving from one problem to the next rather than dedicating your time to growing your business, there could be problems just around the corner. This may a symptom of a chaotic management style or even a business that’s growing too quickly, but it could also be a sign that there are some serious issues at play. For example, perhaps not all the directors or partners pulling their weight, or maybe there are disagreements about the direction the business is going in. Either way, these issues need to be resolved quickly to avoid serious financial implications.  

You have a number of accounts receivable

If you’re struggling to collect payments from customers within a reasonable timeframe then you could experience serious cash-flow problems in the near future. It could be that you need to implement a more effective collections process or introduce early payment incentives to encourage clients to make payments on time. It’s often the case that large organisations use their clout to bully smaller businesses into accepting longer payment terms, but extended payment terms are not something you should agree to lightly.  

You’re not being paid

If you’re not taking a salary as the business owner or a company director then that’s a clear sign that danger may lie ahead. In the early days, some business owners make a conscious decision not to take a wage, but when this extends into the longer-term, it could be indicative of a business that is neither viable nor profitable in its present state.

Don’t bury your hand in the sand

If you recognise one or more of these warning signs in your business then the worst thing you can do is to bury your head in the sand. Seeking advice immediately and facing the problem head-on is your best chance to turn the situation around.