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What are the signs of financial distress?
As trusted advisers, accountants are often the first professionals to notice when a client is beginning to experience financial difficulties. Spotting the warning signs early can make a significant difference to the options available and, in many cases, can help preserve value, protect jobs and achieve a better outcome for all stakeholders.
Financial distress rarely occurs overnight. It is usually the result of a series of events or pressures that gradually impact a business’s ability to meet its obligations. Recognising these indicators allows for timely conversations and proactive solutions.
Common Warning Signs of Financial Distress
Arrears to HMRC
Falling behind with VAT, PAYE, Corporation Tax or other HMRC liabilities is one of the clearest indicators of cash flow pressure. Businesses often prioritise suppliers and wages before tax liabilities. Growing arrears can quickly escalate if left unaddressed and HMRC are one of the most proactive creditors in issuing winding up petitions.
Non Payment of Accountants Fees
There is becoming a growing trend whereby some directors are neglecting to settle their accountants bills. This can lead to the withdrawal of services and a reduced oversight of the financial position by the director.
Trade Suppliers Withdrawing Credit
If suppliers begin requesting payment upfront, reducing credit limits or placing accounts on stop, it often indicates a loss of confidence in the company’s ability to pay. This can severely impact trading and cash flow.
Personal Guarantees Being Offered
Directors who feel pressured to provide personal guarantees to secure finance or maintain supplier relationships may be attempting to keep the business afloat despite underlying financial difficulties.
Employee Redundancies
While restructuring can be part of a healthy business strategy, unplanned redundancies driven purely by cash flow concerns may indicate wider financial problems.
Bailiff or Enforcement Action
The involvement of enforcement agents, High Court Enforcement Officers or other debt recovery action is a serious warning sign that creditor pressure is increasing.
Customer Disputes and Contractual Issues
Significant disputes with key customers, cancelled contracts or legal claims can affect income, damage reputation and create uncertainty around future cash flow.
Increasing Bad Debts
Rising levels of unpaid customer invoices or customers becoming insolvent can quickly place pressure on working capital, particularly where margins are already tight.
Director or Shareholder Disputes
Disagreements within the management or ownership team can distract from day-to-day operations, delay important decisions and undermine business stability.
Overtrading
Growth is positive, but expanding too quickly without sufficient working capital can leave profitable businesses struggling to meet day-to-day financial commitments.
Changes in Company Officers
Unexpected resignations or frequent changes in directors or company officers can sometimes indicate underlying concerns about the financial position of the business.
Bounced Direct Debits and Returned Payments
Missed direct debits or unpaid electronic payments often point to insufficient funds and worsening cash flow management.
Requests for Additional Credit
Repeated requests for extended payment terms, increased overdrafts or additional borrowing may suggest existing facilities are no longer sufficient to support trading.
Re-financing Company Assets
Refinancing assets can be a legitimate way to release working capital, but doing so without a proper funding structure in place may indicate that that conventional funding options have become limited.
County Court Judgments (CCJs)
CCJs demonstrate that creditors have taken formal legal action to recover unpaid debts. Multiple judgments or increasing legal action should never be ignored.
Negative Balance Sheet
A balance sheet showing liabilities exceeding assets may indicate that the company is technically insolvent, even if it continues to trade.
Removal or Reduction of Bank Facilities
Banks reducing overdrafts, withdrawing lending facilities or tightening covenant requirements can significantly impact a company’s liquidity.
Minimal Payments Towards Credit Cards
Making only minimum monthly repayments on business credit cards can indicate increasing reliance on short-term borrowing to fund operations.
Late Payroll
Difficulty paying employees on time is often one of the final warning signs that cash flow has become critical and requires immediate attention.
Early Action Creates More Options
Many directors delay seeking advice because they believe the situation will improve, or they fear the implications of asking for help. Unfortunately, delaying action often reduces the range of available solutions.
The earlier financial difficulties are identified, the greater the opportunity to explore options such as business restructuring, refinancing, turnaround strategies, informal creditor negotiations or formal insolvency procedures where appropriate.
Leonard Curtis Viewpoint
Ignoring the early warning signs and continuing to trade could lead to potential personal liability for a director. An early conversation can make all the difference.
As licensed insolvency practitioners, we work alongside accountants to provide practical, confidential and independent advice tailored to each client’s circumstances. Whether the issue requires a simple discussion, an informal review of the business or more formal restructuring options, seeking advice early maximises the chances of achieving the best possible outcome.
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Leonard Curtis is a trading style of Reach Commercial Finance Limited, registered at Riverside House, Irwell Street, Manchester, M3 5EN. Company Register number is 09056450. Reach Commercial Finance Limited is authorised and regulated by the Financial Conduct Authority, FRN: 753686. Reach Commercial Finance Limited is an authorised credit broker and not a lender. We work with an unrestricted number of lenders to find a potentially suitable arrangement for your consideration. ICO registration ZA069234 and you can check via www.ico.org.uk. We will receive commission from lenders. Different lenders pay different amounts depending on different commission models. For transparency we work with the following commission models: fixed fee, fixed rate of commission, percentage of the amount you borrow and rate for risk (this is based on the risk profile of the business). Further details of the commission model, calculation and amount will be disclosed to you throughout your customer journey. Privacy notice.
Leonard Curtis Legal Limited is a limited company, registered in England and Wales with registered number 09820186. Registered office: Riverside House, Irwell Street, Manchester M3 5EN. Leonard Curtis Legal Limited is registered with the Solicitors Regulation Authority with number 626004.