When operating a business it is important that you are able to look critically inwards. It is vital for owners and directors to be able to spot the early warning signs of insolvency, so you know exactly when it is important to take preventive measures that could save your operation. 

Insolvency can seemingly strike out of nowhere if you aren’t keeping an eye out for these potential red flags. Even businesses that from the outside looking in may appear to be doing well can succumb to insolvency. All it can take is a couple of questionable decisions, for circumstances to change, consumer trends to deviate, or forced closures, etc.

In this blog we will discuss what is meant by insolvency, the importance of recognising the signs, what tests are available, as well as detailing a few insolvency warning signs to watch out for.

What is Meant By Insolvency?

Insolvency is when a person or business that cannot meet their financial obligations to lenders. This holds particular weight if they are regularly unable to pay debts as and when they are due. This inability to meet commitments can lead to insolvency proceedings, which could result in assets being repossessed to pay the outstanding debts.

While it is possible for business owners to contact their creditors directly in order to attempt to negotiate repayment on more manageable terms, (some parties may be amenable to this option), it is not always possible to come to an agreement that suits both parties. Such a failure can result in forced liquidation of your company in order for your obligations to be met. 

Insolvency is commonly caused by factors such as: 

  • Ineffective cash management 
  • Unforeseen reductions in business
  • An increase in expenses 
  • Poor budgeting 
  • The loss of a pivotal supplier/suppliers increasing their prices out of your budget   

Why Recognising the Signs is Essential

Every year in the UK, between 350,000-400,000 businesses, or around 10% of the total stock, succumb to insolvency and are forced to cease operations. Recognising the warning signs of insolvency are vital if you want any hope of righting the ship and improving the status of your company in the long-term before it is too late. 

Spotting these warning signs of insolvency should be considered a core responsibility for any company owners/directors, particularly if your business begins to take a turn for the worst. Insolvency can catch directors off guard, and it is surprising just how quickly a situation can go from normal to bad to worse.

The COVID-19 pandemic saw an unprecedented number of businesses forced to shut down. The unforeseen nature of the interruption to operations meant most companies were left unprepared. Routinely keeping track of your company finances can help ensure that no matter what, you remain as protected as possible.


Early Warning Signs of Insolvency

If you have any suspicions of insolvency, you need to act fast. Consulting with a licensed insolvency practitioner at the earliest interval can ensure that all the possible early warning signs of insolvency such as limited cash flow, reaching maximum overdraft, creditor pressure, etc. are spotted and measures can be made to attempt to improve your situation. 

Early warning signs of insolvency that you should be keeping an eye out for includes:

Limited Cash Flow

If you find yourself operating bill to bill, constantly straddling that fine line of operating in the red and in the black, then you should consider how sustainable and viable your current operation is for the future. 

A business operating with low cash flow should be considered at risk of slipping into insolvency should their situation worsen for any reason. 

Unable to Pay Debts When They Fall Due

An inability to pay vital bills when they pass due; be it electrical bills, rent, staff wages, or paying suppliers, should be seen as one of the largest red flags of potential insolvency. 

A company with a history of being unable to meet their obligations on time will be seen as a huge risk for any potential lenders or suppliers. 

Pressure From Creditors

Perhaps one of the clearest warning signs to watch out for. If your creditors are constantly putting pressure on you to pay off your obligations you should consider speaking to an expert insolvency practitioner as soon as possible. 

Now the COVID-19 pandemic allowance periods have ended and debt thresholds have returned to normal, a business only needs to owe £750 before a creditor is able to apply for a winding up petition that would see your assets sold off to pay the debt owed. 

Overstretched Your Lending Limits 

Have you reached the limit of your bank overdraft? Perhaps your latest loan application has been rejected? Suppliers refusing your requests for credit? Are the banks demanding personal guarantees in order to lend you money? All of the above could be seen as huge red flags for your company’s long term future and current solvency status. 

Any of these positions would leave your business in a precarious position — the most important thing to do if you are faced with such complications is to not bury your head in the sand. Be proactive or you will face the consequences sooner rather than later.  

The Company Insolvency Tests

If you’re looking to determine the solvency of your company, there are a few potential tests to consider. The three main assessments are the balance sheet, legal action, and cash flow tests. Done individually, all three can be useful indicators — but when done together the three tests will paint the clearest possible picture of your businesses future prospects. 

Each of the three company insolvency tests look at different aspects of your business and draw different conclusions: 

  • Balance Sheet Test: Comparing your liabilities against your assets will indicate if you are operating solvently or not. 
  • Legal Action Test: Does the business have any current outstanding statutory demands against it?  
  • Cash Flow Test: A business able to regularly pay all bills on time while maintaining a healthy cash flow is unlikely to be in danger of insolvency. 

For more information on the difference between the three main tests, as well as information on how to carry out a company insolvency test yourself, and more, check out our blog going into greater detail on the subject. 


What to Do if Your Company is Insolvent

If it is suspected that your business may be insolvent, the first protective measure you should undertake is to contact a licensed insolvency practitioner. A specialist will be able to assess your situation and determine what the vital next steps should be for your business — whether this may be to restructure, negotiate with creditors, or even cease trading immediately. 

Once your business is deemed insolvent, as company director/owner you are now obligated to place the best interests of your creditors ahead of both your own and your businesses. 

While being found to be insolvent can be an incredibly difficult time, it doesn’t mean that your business is doomed to fail. There are a variety of potential insolvency options available to you that, with the help of your licenced insolvency practitioner, could allow you to turn your operation around and get back onto steady ground.

Options worth considering if your company is insolvent include: 

How Inquesta Helps Insolvent Companies

If you find that your company may be suffering under some form of financial pressure, it is vital that you seek advice that you can trust as early as possible. 

Just as the company director must, the main priority of a licensed insolvency practitioner is to your creditors. However, they will also act in any way to ensure that your best interests are taken into account and to minimise the impact on the long-term viability of your operation. 

Inquesta have been operating in the field for years, our specialist team of insolvency practitioners have decades of experience and have seen virtually every possibility — we know how to help. We’re proud of the personal and all-encompassing service we offer.

Contact us today for a no-obligation consultation or contact a member of our team today.