There are a number of warning signs that indicate a company is in financial distress. A panel of insolvency and restructuring experts at Armstrong Watson recently shared the red flags they commonly see, where swift action is required to improve operational and financial performance.
Red flags for a company in financial distress
Lack of management information
Without accurate, timely information on the performance of a business it is not possible to plan for its future. It is also not possible to monitor whether the business is on track to meet its expected performance, and where it is falling short.
Deterioration of cash flows
This can occur due to a lack of sales, or a lack of margin on the sales achieved. Alternatively, it may be that a lack of control means that the time to collect debts is too long. A delay in getting funds into the company’s bank account means its ability to trade can be compromised. Usually, it is not just one reason, but a combination of all these factors that exists.
Delays in sending creditor payments
A cause for concern is when a business starts to rely on excuses to delay payment to its suppliers. Excuses may include approval issues or updating computer systems but the variations on this theme are endless. It must be remembered that the process of trying to keep within an overdraft limit can be very time-consuming meaning less time can be spent on operational matters, trying to turn the business around.
Increasing stock holdings
Frequently a gradual increase in stock levels is indicative of lower-than-expected sales and not writing off unsellable goods. A lack of management information means that inappropriate amounts and types of stock are purchased. If this stock cannot be quickly sold, then this will have a detrimental effect on working capital.
Key staff leaving
Key staff, particularly the financial director, often are more than aware of a company’s financial difficulties as they have to deal with irate creditors or constant calls from its bankers. If they perceive that management are unwilling or are incapable of making tough decisions to turn the business around, they become disillusioned and start looking for alternate employment.
Owners taking large remuneration payments despite a decline in sales
Business owners should be rewarded for their work and the amount drawn should reflect the performance of the business. Unfortunately, often owners continue to withdraw large amounts, perhaps to maintain their personal lifestyle, leaving the company in a vulnerable position.
Denial and excuses
It is not uncommon to see directors of a failing business sticking their heads in the sand, not wanting to face the reality of company failure. Repeated underperformance is often due to ‘uncontrollable’ factors rather than something fundamentally wrong with the business model or management team. There is often a break-down in management team relationships where different team members have diverging views on future strategies, and the ‘blame game’ is rife.
Regular refinancing or use of expensive time critical finance
A customer needing to refinance or obtain expensive secondary lending on a property or another asset could be indicative of financial pressures.
Irrecoverable loans to directors or associated businesses
Sometimes a company’s balance sheet looks relatively healthy. However, one can find a substantial sum of money, shown in current debtors, is due from parties that cannot or have no intention of repaying the balance. These balances can mask the true financial position of the business. If money is extracted using loan accounts in lieu of salary the reported profitability is likely to be over-stated.
HMRC arrears or a Time to Pay (TTP) agreement in place
HMRC is often low down on the priority list for payment as HMRC is unable to take immediate action that would place the business in jeopardy. Overdue HMRC debts are a clear sign that all is not well. They are the creditor that is most likely to take action to place the company in an insolvency process.
Act before it is too late
If any of these warning signs resonate with you and your business, then you should act quickly to obtain independent expert advice. Speedy action is required so that as many options as possible are available, and the chance of success is maximised. An insolvency practitioner can review your business and identify key risk areas. Options can be examined and a future plan established. They will provide a useful sounding board and assist with the implementation of the plan if necessary.
For further advice and support that could help get your business back on track, please get in touch. Call 0808 144 5575 or email help@armstrongwatson.co.uk.
