How to Spot the Warning Signs of a Company Bankruptcy

Pending signs of insolvency can easily be missed when management is focused on the day-to-day running of the business. Smaller issues are sometimes incorrectly diagnosed. This means larger problems are overlooked that affect operations on a wider scale.

For anyone wondering how to spot the warning signs of a company bankruptcy, here are few key signs to look out for

Small cash-flow issues

It can be easy to miss big issues with cash flow as there are a lot of factors that can impact it. If overlooked for too long, it could pose a big threat to the financial stability of the business.

Inefficient credit control, or low sales, could be affecting your ability to pay bills on time. It can be difficult to get to the root of the problem quickly. Managing your cash flow on a daily basis is the best solution. You can track this through a simple spreadsheet detailing all income and outgoings.

Rapid cost-cutting

Cost-cutting can be a way to streamline finances within a business to further increase profits. It may also be a sign of larger problems in the company. Employment costs could be too high. Or, you may have deferred rent payments to help ease short-term expenditure.

Reducing your workforce may be an unneeded drastic measure you can’t afford for now. Small spending reductions in other areas of the business can provide stability and help to avoid bankruptcy.

A need for more cash

If your overdraft is always at its limit, the bank will be aware there could be a larger problem with the business. They may start to look at your performance to identify other signs of financial distress. This can include checking for returned cheques or payments. They could also analyse your credit rating and their own security of any funds you have borrowed from them.

If other lines of credit have been exhausted, you may want to look at alternative ways to receive cash quickly. A quick injection of cash back into the business can help you stay afloat to find a more sustainable long-term solution.

No reliable management information

With no cash flow forecasts, bank reconciliations, aged debtors reports or sales forecasts available, directors cannot make informed decisions related to the business. Without access to this sort of information, there is no way of determining how much is owed to the company or the extent of the debt. There are very few rescue options available at this point, making it a dangerous situation for the business.

Outstanding payment demands

Receiving constant legal demands for payment of unpaid bills, or being in possession of a Statutory Demand from an unsecured or secured creditor, is a very bad sign. A winding-up petition usually follows a Statutory Order, which could close down the business.

When HMRC are chasing for payment, the company is already in a tight spot as there is very little wiggle room. You are likely to receive strong penalties for late payment of tax. This further intensifies an already unmanageable financial situation.