With c.50,000 UK businesses facing critical financial distress, taking early action is vital, but directors must know what to look for
Recent figures from Red Flag Alert show that nearly 50,000 UK businesses are facing critical financial stress, thanks to a toxic cocktail of debt hangover from Covid, high interest rates, inflation and energy prices and hikes to corporation tax and the National Living Wage. In addition, the report also found that 539,900 UK firms were facing “significant” financial stress by the end of 2023, Many of these companies are likely to become insolvent and face liquidation, but what can these businesses do to attempt to address the issues they are facing? Early action is vital.
Before looking at the different options available for resolving financial distress and looming insolvency, it’s important to understand what financial distress is and how to spot the key signs. Only then can early and correct action be taken. We are grateful to the R3 Association of Business Recovery Professionals for this useful article & guide.
What is financial distress?
Financial distress is where a company cannot generate sufficient revenues or income, making it unable to meet its expenses and other financial obligations. It is the first step on the road to insolvency. Many business owners and directors whose companies are facing financial difficulty may simply not be aware of the fact, or indeed the scale, of their company’s issues. Or, if they are, they might be reluctant to admit it, and instead start putting key business expenses on personal credit cards or running up debts to the company through a director’s loan account for example, in the hope that things will improve.
Spotting the signs of financial distress at an early stage is vital
Spotting the signs of financial distress at an early stage can prevent financial problems from becoming unmanageable and may mean that more options are available to resolve a company’s financial situation. Members of the insolvency and restructuring profession can help directors and owners do just that.
Lengthening of Creditor days is one of the first signs of financial distress
One of the first signs of financial distress is where a company is lengthening its creditor days (i.e., the number of days it takes to pay suppliers from the date the payment is due). This is often a sign of cashflow issues and may indicate that the company will become increasingly less able to pay its debts as they fall due.
Other signs that a business doesn’t have sufficient cash or working capital to pay debts as they fall due include:
- Tax debts: Failure to pay tax liabilities such as National Insurance, PAYE, and/or VAT can often be a key element in losing control of company finances. HMRC can sometimes end up being a large creditor in failing businesses with numerous debts to recoup.
- Pension deductions: Failure to pay pension deductions from employee’s wages to a pension provider.
- Cancelling staff bonuses: Failure to pay bonuses may be a sign that finances are on the decline.
- Lack of investment: Failure to invest in new technology, people or marketing, or essential repairs not being undertaken to buildings or machinery.
- Directors’ remuneration: The directors not being able to draw an income from the business can be a sign of financial distress.
- Stock levels: An increase in stock levels may be an early indication that incoming orders are reducing. This can be a clear sign that a company’s financial position is deteriorating.
- An increase in stress: A company in distress usually results in increased stress for its directors and management. Stress and worry can lead to bad decision making which only makes things worse.
If you have concerns with any of your clients about any of these triggers, please speak to one of our team in any of our offices
Much of our work is referred to us by our contacts in the accountancy profession, and our first aim is to see if we can save a business through restructuring by using Administrations or Company Voluntary Arrangements. R3 figures show that around 40% of businesses are saved when an Insolvency Practitioner is appointed.
We also have our own Insolvency and Restructuring Free Guide that you can download,
Contact us or call us on any of the numbers below for help and advice on insolvency, restructuring and recovery.
Also, K&W Recovery, trading as Antony Batty and Company, Thames Valley:
