How to Spot the Signs of Business Failure & Insolvency

Failing Companies are at risk of insolvency when they don’t have enough cash to cover their bills — signs of business failure include when a firm is unable to pay its financial commitments or if the worth of what it owns is less than the money borrowed from creditors.

Many businesses fail due to poor cash flow management and inadequate financing as a result of poor management or inadequate business model. However, there are several other causes of business failure.

Here are some of the warning signs that the business is no longer a profitable business and might become insolvent soon.

Table of Contents

Is There No Money to Pay Staff Wages?

If you are a business owner that is finding it difficult to even come up with the cash to remunerate your employees, or if you as the founder have forgone a salary for months, insolvency might be right around the corner for your business. Sound familiar? “We just need to wait for that next big sale.”

If so, then chances are good that insolvency is looming. Once workers’ wages go unpaid, by law your business is considered insolvent.

Does Your Company Have a Negative Liquidity Ratio?

The liquidity ratio determines if a business can pay off its current debts with its current assets. A score of under 1 signifies that the organization does not have enough resources to cover what it owes. Such cash flow problems could lead to insolvency.

Although this metric is valuable in seeing financial strain, one must also consider a company’s ability to seek out other forms of funding before making any decisions.

Is Your Business Struggling to Obtain Finance?

Lenders have a variety of methods to determine if a company is worth investing in. If shareholders, investors, banks, or other lenders are not willing to finance a business, it might suggest that these individuals question the organization’s ability to make profit or be successful in the long run.

It’s important not to assess this measure alone; during periods of economic hardship, creditors are often more hesitant and more likely adopt a wait-and-see approach with investment and lending opportunities.

Do you Have a High Staff Turnover?

If your employees are leaving, it could be because they see a problem that you don’t. Could the issue be larger than you think? Not only is replacing staff time-consuming and costly, but new staff are also more likely to make mistakes and be less efficient.

Is Your Business Currently Subject to Creditor Action?

Although it’s not uncommon for businesses to miss payments every once in a while, County Court Judgements (CCJs) should trigger some alarms. A firm that settles CCJs within 30 days won’t have it reflected on their records.

As soon as you get a CCJ, suppliers will see it as a big red flag. Credit reports will also highlight this danger sign on credit reports.

Is Your Business Experiencing Falling Margins?

If your margins are dropping, it might mean that either your business costs are too high, or your income is too low (or both).

An unhealthy margin suggests an unsustainable business—one that will eventually fail. To turn things around, some small businesses will try to increase sales by reducing prices. But sometimes cutting costs is a better solution.

Has There Been a Decline in Business Reputation and Market Position?

A common indicator of an impending business failure is a decline in reputation and a decreasing customer base. As customers become aware of the poor performance, they begin to search for alternatives. In some cases, businesses will attempt to repair their reputation through marketing campaigns or by relaunching or rebranding themselves.

However, this is only effective if there is a purpose behind the new brands or products that would actually improve the business. If not, it’s simply a way to prop up failing performance – and insolvency may be inevitable.

Is Your Business Being Offered Finance with Higher-Interest Payments?

Often, when a bank offers you high-interest rates for business loans, it implies that the bank is uncertain about the health of your company and wants to proceed with caution.

This can make an already difficult situation even more complicated. However, there are now more borrowing options than ever before. But tread cautiously; before taking on any new loans be sure you believe in the future prospects of your business.

Is Your Business Insolvent?

If you believe your company is already insolvent, please feel free to contact us here at Company Doctor. Speak with one of our professional advisors and we can discuss whether a Creditors Voluntary Liquidation is appropriate for you. If not, we can also discuss what the alternative options entail.

A Creditors Voluntary Liquidation puts you in control of closing your company with the appointment of an Insolvency Practitioner (IP) in the position of liquidator.

The IP would handle all the administrative aspects of the CVL and send all statutory documents to the creditors and liaise with Companies House.

Failure of a company director to act in the event of company insolvency could lead to action being taken against the director such as being made personally liable for business debts.

One or more of the company’s creditors could also initiate a winding up petition against the company leading to a compulsory liquidation. This would take the closure of the business out of the hands of the company’s directors.

We have our own licensed Insolvency Practitioner with decades of experience. Call us on 0800 169 1536 or complete the simple online form and let us help you put your mind at ease.