Act now, before it’s too late – 6 signs of a business in distress

If you’re leading a business and you’re finding it tough going, planting your head firmly in the sand is not a workable strategy.

You may feel alone. But you’re really not.

There’s a wealth of experienced support out there ready to help you. It doesn’t have to end badly, in fact, the earlier you get help, the better – for you, for your employees and your stakeholders.

A business that has experienced rapid growth can unwittingly plant the seeds of failure during these good times. Taking an eye off the management information dashboard and focusing on the operation can lead business owners to miss vital signs of looming trouble, such as over-trading, where a business takes orders without considering its cash flow.

Early signs of underperformance can be tricky to spot. Lower than expected bank balances, interest rise hikes for those in debt and changes in inflation (as we have seen so much of in 2022) can compound to cause liquidity or cash flow problems.

The 6 signs of distress

Businesses can avoid insolvency by implementing recovery measures before it’s too late, the six warning signs that a business is in distress are outlined here:

·       Cash Flow

The first sign things are going wrong is a constant lack of cash.  The old adage that cash is king exists for a reason.  All businesses suffer periodic dips where cash is tight.  But if cash flow is continually a problem, the business is in trouble.  If a business is continually spending more than it earns, unless it is deliberate and well-funded (as with some tech businesses at launch) it will lead to problems.

·       High interest payments

This could indicate poor financial health and be a sign your bank or other lender is suspicious of your viability.  If lenders view you as high risk, funding debt will cost more.  It is also a bad sign if lenders always seek stronger personal guarantees or security against any money they lend.

·       Defaulting on bills

Everyone misses a payment or forgets a bill, but if the frequency with which it occurs increases, it suggests a business can’t pay its way.  This is a sign it is underfunded, isn’t chasing debts hard enough or is heading to liquidation.  Defaults on HMRC or on other formal arrangements can be particularly damaging.  It can also be bad for your reputation and that of your business.

·       Extended debtor or creditor days

Another sign of possible trouble is a rise in either debtor or creditor days.  If your business has to delay payments to creditors, this can force some suppliers to cut off the supply of vital components or ingredients.  Likewise, if you are unable to effectively chase payment it may cause future cash flow problems.  Either way, sudden changes in these numbers should be investigated to see whether they are signs of something more serious.

·       Falling margins

Ask any experienced entrepreneur and they will tell you that for long-term survival what matters are profits, not sales.  As the old saying goes, turnover is vanity, profit is sanity.  Falling margins suggest that costs are too high, and prices or income is too low.  This is not a sustainable position.

·       Unhappiness

It may sound simple, but businesses in distress are rarely happy.  Owners and managers, who can sense something is wrong (but may not be sure what) get stressed and pass it on.  They start cutting at random to make savings or deploy sudden switches in strategy to try and revive things.  Lots of senior people may leave in a short time.  These are all signs that the business might be heading down the decline curve and that action is needed urgently to pull things back.

Distress, not yet crisis

Now there is something to remember here and it’s important.

Here we are looking at a business in distress, not one that is in crisis. Recovery is possible. The earlier you spot the signs of distress and take some action, the better.

It is very easy to leave it too late, business owners exacerbate this problem by being reluctant to consider assistance from a licensed Insolvency Practitioner (IP).

Taking advice sooner rather than later and speaking to a licenced IP can make all the difference and allow for more options to be available.

In our next blog, we’ll be looking at businesses in crisis, the options open to them and how to manage the process.

If you’re experiencing any of the 6 signs of a business in distress, please do get in contact with us for a no-cost initial and confidential conversation. Call us on 01202 237337. We’re an experienced team with strong values. We like to understand your needs and ensure you have the best advice possible. We’re experts in all areas of insolvency; you can read more about us on our website here.

6 signs article credit: ICAEW