The Early Warning Signs of Business Distress

It can be surprisingly easy for a profitable company to find themselves sliding towards a state of business distress. Often this may not have anything to do with your running of the business, but instead down to external factors beyond your control. Perhaps you have lost a key client to a competitor, the market you operate in has taken a severe downturn, or you have suffered bad debt due to the non-payment of a large invoice.

Regardless of the reason behind your problems, you should be aware of the early signs of impending trouble. The following list contains some of the things to be aware of, however, it must be said that these being present do not always automatically mean there is something wrong with your business. Indeed some of these actions could form part of your wider business plan; it is if these are unexpected or suddenly thrust upon you that you should take note:

• Cash flow issues – Unhealthy cash flow is the death of many businesses, even those who, on the surface, appear to be successful. Cash flow is not just about how much is coming in and out of the business, it is also about when these transactions are taking place. Too much coming out at one time, and incoming payments being delayed, can see operations grind to a halt. If you are struggling to make payments to suppliers, employees, or HMRC on time, you may have a cash flow problem. As a business is typically involved in many different transactions, it can be difficult to get to the root of this issue. Get into the habit of checking your incomings and outgoings on a daily basis; it is only by being familiar with how money is leaving your business that you can help reduce the amount going out and ensure everything that should be coming into the company’s accounts actually is.
• Late payments from customers – It doesn’t matter how many orders your business is generating, if your customers are not paying you for this work, you have an issue. Late payments can have a serious impact on your cash flow, and the longer invoices remain outstanding, the less chance you have of seeing the money at all. Be firm and persistent when chasing late payers, and don’t be afraid to impose stricter terms for any future work with them. Consider asking for a deposit, or look at reducing your invoice payment terms.
• Trade slowing down or an increase in your stock levels – If your incoming orders are reducing and your stock levels are rising, this is a sure sign that all is not well. It is vital that you understand the reason behind this sudden change; are competitors undercutting you, is your service offering no longer what your customers are looking for, or has the market moved on?
• Requesting longer payment terms – Asking your creditors for longer to pay what you owe could be a way of managing your cash flow, or it could signify deeper problems. If you cannot meet your liabilities as and when they fall due you could be technically insolvent. If you suspect this is the case, you need to seek professional advice as a matter of urgency.
• Looking for additional funding – Seeking funding could be part of an expansion or growth project; however, it could also sound alarm bells that your business is not generating enough money to survive. Look at the reasons behind your borrowing, this will often tell you whether this is something you should be concerned about.
• Key staff leaving or major contracts coming to an end – The loss of an important employee or a big contract signals change, and with it, a step into the unknown. This is not necessarily a time to panic, but you should be on your guard when these changes are implemented in your business and watch how things pan out carefully. It could be that the new recruit seamlessly fits into place within your company, and you sign an agreement on a new, profitable contract from another client almost immediately. However, should you fail to secure a significant job or you struggle to fill the gap of the departed employee, you are advised to take swift action to solve this problem.

Take heed of these signs, and if you notice them take steps to get to the root of the issue. Often a plan can be formulated to get your company out of the red and back on the straight and narrow. Left too late, however, and many of these options will either be ineffective or simply no longer a viable possibility.

If you are concerned that your business may be experiencing the first signs of distress, contact Begbies Traynor today. With over 70 offices up and down the UK and over 100 licensed insolvency practitioners, we are perfectly placed to help you and your business. To arrange a no-obligation consultation call 0800 063 9221.