Six signs of business distress

07 February 2023

A financially distressed business is one that cannot bring in enough revenue and is unable to meet its expenses. Without the right help, this can ultimately lead to a company becoming insolvent – unable to pay the debts it owes, or where its debts are greater than the value of its assets.

A business stands a greater chance of turning its situation around if advice is sought before it becomes insolvent – although the profession will always look to rescue a business wherever possible.

This is why it’s so important company directors constantly look out for signs their business may be struggling.

It might start as a few missed payments here and there, or with a couple of extra boxes of stock on the shelves, but without intervention these issues often snowball until it’s too late and a company becomes financially distressed – unable to generate sufficient revenues or income, and meet its expenses and other financial obligations.

There are six key indicators a firm may be financially distressed – we outline them below…

Issues with cashflow

The first sign that there may be trouble ahead for your business is a lack of money in the bank. Cashflow is the lifeblood of any business and without enough money coming in, there’s a risk debt will begin to mount.

While it’s normal to go through short periods where money is tight, it isn’t normal for cash flow to be a persistent issue, especially if it’s affecting your company’s ability to operate normally or carry out activities such as buying stock, paying salaries and clearing bills.

Missing payments and unpaid bills

Are you being chased for tax payments? Are you regularly delaying payments to your creditors? Or missing payments all together? These are all signs that your business is financially distressed.

Tax liabilities such as National Insurance, PAYE and VAT can often be a key element in losing control of your finances, with HMRC often ending up as a large creditor in failing businesses.

And don’t forget about your employees too – if you’re failing to pay pension deductions from employee wages to your pension provider, this is a serious issue.

Unplanned cuts

Creditors like your bank, HMRC and suppliers are important, but so are your staff.

If you’re cutting back on employee benefits, cancelling staff bonuses, or failed to replace employees who have left as a means of saving money, these are all signs your company is in trouble.

Similarly, if you and your fellow directors have had to stop drawing an income from the business then it might be time to start asking for help.

Lots of stock

An increase in stock levels may be an early indication that you’re not getting as many orders as you used to and a clear sign that your company’s financial position is deteriorating.

It also indicates a change in customer behaviour, and you’ll need to understand why that’s happening. Has the quality of your product decreased? Are you issuing a lot of refunds or dealing with an increase in complaints? Or is there simply a better competitor on the market that meets your customers needs better than you do?

Addressing these questions will help you understand why you’re not bringing in enough revenue and speaking to someone about your rising stock levels should help you understand how best to resolve the situation.

Lack of investment

You have to put something into a business to help it grow. These investments can include things like new technology, product updates, people or marketing, staff training and development, or even essential repairs to buildings or machinery.

If a business is facing financial concerns, it’s not going to have any extra capital to invest in these kinds of upgrades. This can result in high staff turnover and a drop in returning customers or referrals.

Signs of stress

If you’re struggling to balance the books, having to make uncomfortable phone calls to creditors, and are constantly fighting fires instead of growing your company, you’re going to feel stressed.

And this doesn’t go unnoticed. Staff will soon realise if things are going badly, which usually then leads to high turnover and increasing recruitment costs.

It might seem obvious, but a general feeling of unhappiness, low morale and increased stress for both you and your staff are one of the greatest signs that your company is financially distressed.

Seek advice early

A lot of business owners are simply not aware of the fact, or indeed the scale, of their company’s issues.

Understanding how to spot the first signs of financial distress and acting at an early stage can prevent financial problems from becoming unmanageable and may mean that more options are available to resolve your company’s financial situation.

R3 has produced a free guide for company directors which outlines the signs of financial distress and the options open to directors for addressing it. You can read more at: https://www.backtobusinessuk.com/