Begbies Traynor Group

What are the signs of business failure?

Date Published: 22/05/2024

How can I tell if my business is failing?

When a business fails there are early warning signs to look out for that can help you deal with the matter before it becomes too damaging. Lack of cash often the first indication, and this may materialise as an inability to pay the bills on time.

It’s important to spot these signs as early as possible so you can take aversive action and avoid insolvency. You may be able to renegotiate your debt repayments, for example, or secure a form of alternative finance to support the business in the long-term.

So what are the signs of business failure, and what can you do to avert disaster?

Lack of cash

If you’re struggling to pay suppliers or other regular expenses, it’s a strong indication that the business is in financial distress. A problem with cash flow is typically the first sign, but it’s advisable to take a broader view of your business to understand the full impact.

Maybe you’ve received threatening letters from your creditors, or HMRC has imposed penalties for late payment, for instance. You also need to identify the specific reasons for the lack of cash – a common cause for businesses in this situation is being unable to collect their own debts efficiently.

What can you do?

Cash flow forecasting will help you see the full extent of the problem, and allows you to identify where cash shortfalls occur. Alternative forms of finance may also be a good option, and are generally easier to obtain than bank funding. They’re flexible, and depending on the type of alternative finance, your business’ credit record may not be an issue.

Your customers are paying late

Late payments are a common cause of business failure as they prevent you from operating to full capacity. You may have to pay your own suppliers before receiving payment from customers, and if these incoming payments are late it compromises your finances even more.

What can you do?

Strengthening your payment collection system is a must, but invoice factoring can also help because you hand over control of your collection procedures to the factoring company.

You don’t know your business’ financial position

If you don’t know exactly how much your company owes, or is owed by your own debtors, it’s easier for it to slip into insolvency. You then run the risk of wrongful trading if you continue to operate whilst insolvent.

What can you do?

Management reports, including cash flow forecasts, profit and loss accounts, and your balance sheet, show the full financial position of your business. You or your accountant could use three-way forecasting using these reports to assess the full extent of the problem.

Constantly ‘firefighting’ issues

When it feels like you’re dealing with more problems than you can handle day-to-day, rather than working on growing the company, it’s a strong sign that the business is failing. Maybe creditors are harassing you for payment or key staff are leaving? Whatever the issues you’re facing, it seems impossible to move forward.

What can you do?

Obtaining professional help can prevent the business from sliding into insolvency, and provides valuable support for you. An accountant or licensed insolvency practitioner will be able to identify the areas to focus on - they can also help you communicate with HMRC if you owe them money, and assist in sourcing finance.

Loss of a key customer

If you rely solely on one or two large customers and one of them leaves, it can be catastrophic for cash flow. It takes time to secure more business, but sliding into insolvency can happen very quickly and the loss of a key customer may be the start.

What can you do?

You need to constantly market your services or products even when business is good. It can be reassuring to know that you’re able to attract key customers or major brands, but it’s important not to rely on them solely.

It’s highly advisable to seek expert support if you spot any of these warning signs, as you’ll receive valuable advice and guidance. Begbies Traynor is the UK’s largest professional services consultancy, and can assess your business’ current situation. Please contact our team of experts to arrange a free same-day consultation at one of our network of offices nationwide.

About The Author

Meet the Team

Jonathan was a founding director of Cooper Williamson which was acquired by Begbies Traynor in October 2013. 

Jonathan was involved in the inception and continued with the development of the "Real Business Rescue" website, which provides advice and assistance for the directors of limited companies which are experiencing various degrees of financial distress throughout the UK. 

Jonathan is a member of the Insolvency Practitioners Association MIPA and is a Member of The Association of Business Recovery Professionals MABRP.

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