Warning signs of insolvency

Insolvency occurs when an individual or business is unable to meet its financial obligations and pay debts as they become due. Recognising warning signs of insolvency is crucial for taking proactive measures. Here are 10 common warning signs:

1. Cashflow issues: Persistent and severe cashflow problems, where a company consistently struggles to meet its day-to-day financial obligations, can indicate insolvency. Are you always in or at the limit of your overdraft?
2. Increasing debt levels: A rapid and unsustainable increase in debt, especially short-term liabilities, can signal financial distress. This may be evident in a rising debt-to-equity ratio.
3. Delayed payments: Regular delays in payments to suppliers, creditors, or employees can indicate financial difficulties. Late payments may lead to strained relationships and potential legal issues. 
4. Declining profit margins: Consistent and significant declines in profit margins over a period may suggest underlying financial issues. A business should generate sufficient profits to cover its operational costs and debt obligations.
5. Declining revenue: A sustained decrease in revenue without corresponding cost reductions can contribute to financial instability. It may be a sign of declining demand, market changes, or mismanagement.
6. Lack of access to credit: Difficulty in obtaining credit or a sudden reduction in credit limits from lenders can be a sign that financial institutions perceive increased risk.
7. Asset liquidation: If a company is forced to sell off its assets to meet short-term obligations, it may indicate financial distress. Selling assets at a loss can exacerbate financial problems and put directors in potential risk of action, should an insolvency follow.
8. Legal action and judgments: Legal actions, such as lawsuits, judgments, or liens, can be indicators of financial difficulties. Creditors may resort to legal means to recover debts; or perhaps something as simple as being placed on stop by your suppliers.
9. Insolvency of key suppliers or customers: An insolvency within the supply chain or to a key customer may have a critical knock-on effect.
10. Management changes: Frequent changes in management or key personnel can be a red flag. It may suggest internal issues, lack of strategic direction, or an inability to navigate financial challenges. Also consider loss or death of key staff and directors.

It's essential to note that experiencing one or more of these warning signs doesn't guarantee insolvency, but they should prompt a thorough financial analysis and consideration of corrective actions. Seeking professional advice and implementing effective financial management strategies can help address these challenges and prevent insolvency.

Need help?

If you have any queries or concerns, please get in touch with our Insolvency & Recovery team. We have two licensed insolvency practitioners as well as insolvency managers who can offer advice and help. Call us on 0330 024 0888 or email enquiry@larking-gowen.co.uk.

Lee Green