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A client in difficulty – what are the warning signals?

 

Posted on 24 August 2017

Official figures released by the government’s Insolvency Service suggest an estimated 4,547 companies entered insolvency in Q2 2017, with the total number of company insolvencies increasing by 12.6% compared to Q1 2017.

What the statistics do not tell us is how many of these situations were avoidable and could, with the right awareness and advice, the situation be remedied without the need for a formal insolvency process. Whilst every company is different, and there are no cut and dry diagnostics for identifying every company that is in some form of financial distress, there are several early warning signals that we suggest you look out for in a client’s financial activity.

Issues with cash flow

Possibly the most discernible sign that a client is struggling with their finances is poor cash flow, particularly if this is a recurring problem. Incoming cash which is at a deficit to outgoing cash inevitably leaves a business without sufficient funds to pay bills and debts, and therefore may imply they are on a downwards spiral and facing imminent insolvency. Furthermore, if a client appears to be applying for additional credit to cover these cash flow issues, it also raises questions about the long-term stability of the business.

Poor debt collection

Payments received for business debt after it has been classified as uncollectable, otherwise known as a bad debt recovery, is another tell-tale sign of a business potentially heading for insolvency. More so, an increasing level of bad debt is another sign that a client may be experiencing financial distress as they are unable to pay creditors on time. It’s important to note this doesn’t necessarily spell the end for a business, as most companies have some form of bad debt expense due to customers failing to pay, but it’s important to delve deeper into the accounts to understand why.

Overtrading

Overtrading occurs when a business accepts more work than they can fulfil due to a lack of resources, whether that be staff, working capital, or assets, for example, and often arises because of expansion. By taking on too much too soon, a business risks not having suitable sources of finance, thus being stretched beyond functionality and leading to business failure.

If warning signs are detected early enough and swift action is taken, there is much greater opportunity to seek early recovery routes and deliver a strategy that allows the business to navigate through distressing periods, ultimately ensuring the business continues trading and avoids insolvency all together.

If you have any concerns regarding insolvency, please feel free to contact one of our insolvency experts here.

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