Insolvency isn’t something that happens out of the blue – there are clear signs that indicate cash flow problems within a company, and what most people regard as a ‘successful’ business can go under very quickly, even if sales are up and profits are good.
So what are some indications that business might not be quite what it seems?
1. Late payment of supplier invoices
If using delaying tactics to extend periods of credit has become standard practice, then it might be time to seek the guidance and advice of an insolvency practitioner. Disputing supplier invoices or writing post-dated cheques suggest that cash flow is a real problem. Suppliers will become reluctant to extend credit if they’re having to send final demands on a regular basis, and may even place a stop on the account.
2. Using too many suppliers to obtain credit
Using many different suppliers in order to be granted larger amounts of credit overall might disguise the problem for a little while by spreading the load, but will make no difference in the end.
3. Not knowing how much is owed to the business
Often due to poor internal procedures and systems, this is one of the easiest problems to rectify. Efficient credit control procedures can be implemented quickly, making a huge difference to the flow of cash through a business. The number of days a debtor takes to pay is a key figure that needs to be monitored closely, with strict follow-up procedures in place to make sure no-one falls through the net.
4. Not limiting the amount of credit given to new and existing customers
The company has to balance the risk of their customers looking elsewhere if their demands for credit aren’t met, with the cost of potential bad debts. It’s a fine line between the two, but carrying out formal credit checks can help to get a picture of how solvent they are.
5. Relying on just one or two large customer accounts
If the company is reliant on just a couple of large customer accounts the business will be exposed to their financial difficulties. Spreading the risk by having different income streams or several smaller customers reduces the impact of one customer failing.
Insolvency doesn’t just happen overnight and can be avoided if warning signs are noticed. Professional insolvency practitioners offer valuable preventative advice and support to a business that’s struggling to stay afloat, and can make the difference between success and failure.