It is easy for a business owner to miss the warning signs of insolvency, but being aware of the warning signs of a company in distress can help you keep the situation under control. Cash flow problems are normally the start of a downward trend and could quickly progress to the insolvency of your business. Unfortunately, when a business is in the eye of the storm, the warning signs of insolvency may not be obvious to those charged with overseeing its operations and management. Here is how to tell if your business is heading for insolvency.
Inability to meet liabilities on time
If your business is constantly unable to meet suppliers’ debts within the trade terms then you may be on the verge of insolvency. Even if the business is able to operate within delinquent debts, it won’t be able to avoid the damages incurred on its credit rating, which will drastically limit its ability to obtain important financing assistance in the future. Ask yourself if any of the following situations describe your current situation:
- Fielding phone calls from creditors demanding payments daily
- Suppliers placing a stop on the organization’s account
- Business struggling to meet wage bills
- Reduction in discretionary spending in order to maintain profitability
- Choosing to ignore communications with creditors
Constant lack of cash flow
If you notice a trend where your company is operating within the strict confines of an inflexible monthly budget, it could be a clear indication that the business is in a dangerous position. Cash flow problems are one of the major indications of serious financial difficult, including:
- Need to renegotiate payment plans to secure current supply
- Failure to pay employee benefits on time
- Non-collection of debt
- Financial losses that grind down the working capital
- Increased use of personal credit cards to pay business expenses
Any business that experiences delayed electronic authorization, an inability to make payments when due or bounces cheques is showing clear signs of financial difficulty and could potential have insolvency in its future.
Change in supplier terms
If as a business owner you start to see your suppliers change their original terms and contracts you might be heading towards insolvency. Suppliers typically do not change their mode of payment, delivery communication unless they absolutely need to. If you’re currently having trouble running your business you may experience one of the following situations:
- Inability to obtain mainstream financing from financial institutions
- Inability to pay suppliers within the trade terms
- Suppliers demanding cash on delivery
- The need to renegotiate payment plans to secure current supply
Poor record keeping
A business that cannot maintain organized and accurate records is probably going through a rough time. If a business is experiencing financial difficulties, the management normally focuses less on maintaining up-to-date records and this can be a clear indication of impending failure. Remember, a business without accurate accounting figures, future estimates of cash flow and sales, and information on customer base, will more easily fall into insolvency or have more difficulty obtaining financing to help when cash flow is low.
Legal action
Legal action taken against your business is probably one of the worst signs that you are in fact in trouble and heading for insolvency. Any statement issued against your business in relation to its unpaid debts with suppliers should be a huge concern to you because it can easily result in involuntary liquidation or any of the following legal issues:
- Legal demands to pay creditors
- Commencement of court action to recover the money owed by a business
- Asset repossession by secured creditors
- Repossession of properties
Maxed out overdraft
If your overdraft is completely maxed out at all time you are in serious financial trouble and need to work towards fixing that as soon as possible. Having an overdraft that is at its limit makes it so you have no emergency fund or access to cash in a pinch, this can and will lead to even more financial stress on you and your business.
Seek Help Now
As a business owner, you should remain aware of the warning signs of insolvency, and seek advice as soon as you identify them. A professional will be able to help you assess your current financial situation, figure out what needs to be done and then help you work towards a solution. Asking for help sooner rather than later could help you save your business so get the help you need before it’s too late.
