What are the early warning signs of business distress?

When a business finds itself battling insolvency, this is usually the end result of a chain of unfortunate events. While the slide into insolvency can happen quickly, there are certain signs that every business owner should be aware of which may indicate that their business is under pressure.

  1. Cash flow is becoming tight – A careful examination of your company’s cash flow is one of the best ways of attesting for its solvency. A healthy cash flow should see regular payments coming into your business, with outgoings leaving your account on time. If you are struggling to pay your liabilities as and when they fall due, this should sound alarm bells. There could be numerous reasons behind your cash flow becoming strained, but the important thing is to recognise what this factor is and act accordingly. Keep a close eye on the money entering and exiting your company; this will allow you to recognise areas where money can be saved and also means you can quickly spot any unauthorised or erroneous transactions.
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  1. Customers are paying late – Healthy cash flow relies on the money you are owed being paid on time and in full. Once your customers start to pay you late, the knock on effects to your own business can be devastating. Without funds coming in, you could quickly run out of money or struggle to meet your own outgoings. If this happens you need to be swift at tightening up your collection terms and procedures. Make it clear to your customers that late payments will not be tolerated, and consider asking for a deposit or even the full balance up front before you supply your goods or services to them in the future.

  1. Suppliers are renegotiating your payment terms – If your suppliers are shortening your payment terms then this could be an indication that they are concerned about your ability to pay your bills and are putting measures in place to shield their exposure to you as much as possible. This is likely to happen if you fail to pay your invoices on time, or are unable to pay the full amount owed. Once suppliers start distancing themselves, you could find your production quickly grinds to a halt, causing serious issues for your business.
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  1. Your orders are dwindling – A reduction in the amount of orders your company is receiving, an increase in your stock levels, or a necessity to heavily discount current stock, are all signs that all may not be well with your business. Perhaps the market is changing and your product is no longer desirable, or maybe you are losing customers due to competitors undercutting you. Once you get to the root of the issue, you can start to reconsider your offerings and tailor them to the current marketplace if this is feasible for your business.

  1. Major contract ending – A key contract coming to its end isn’t necessarily a problem if it is being renewed, or if you have alternative work in the pipeline. However, if you have nothing to plug this gap of work, you need to take action – and quickly. Luckily, in this situation the thing you hopefully have on your side is time and the ability to plan for this eventuality. If you know a contract is reaching its end, you should make it a priority to secure alternative work before your current contract finishes. If this is proving difficult, you should speak to your accountant or an insolvency practitioner as soon as you can. It could be that the demand is simply not there for the service you are offering, or you may have to look at reducing your outgoings to make up this deficit.
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It is important to remember that noticing your business displaying is these signs, does not automatically mean that it is in trouble. However, you should take heed of them and put a plan in place to rectify the issue before it escalates into a situation which is difficult to recover from. The earlier these warning signs are spotted the better. Noticed early and a plan can be put in place to turn things around; left too late, however, and your business could face an uphill battle to survive.

Gary Addison is a director at Redundancy Claims UK. Gary advises company directors on issues related to director redundancy, employee redundancy and statutory entitlements.

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