by Shaw Gidley20.02.23

What are the warning signs of insolvency?

Becoming insolvent doesn’t happen in a vacuum. For the vast majority, it’s a slow road there, with late nights spent reorganising funds to pay bills, looking at income and expenses, restructuring processes and roles, and a lot of personal time spent trying to find opportunities to lower costs and save. It can feel, however, like it all happens quickly because the gap between realising you’re insolvent and applying for bankruptcy is fairly narrow. This can be overwhelming for everyone involved, including the business owner or individual, if the signs there weren’t noted to better prepare for an insolvency solution. Here are some of the main warning signs we see for those who have eventually become insolvent. 

What are the warning signs of insolvency?

Poor cash flow is when the injection of actual money (paid invoices etc.) is lower than the debts owed in the same period, meaning all outflows are higher than inflows. It’s important to differentiate between seasonal or sporadic circumstantial fluctuations - you have a predicted low season or need to make a one off large payment - and having a consistent disparity between what you owe and what you bring in. The latter is where it’s a problem, and your business process needs a closer look. You might have contingency available to help you through rough patches, but if it’s consistent, poor cash flow can be the biggest signal of insolvency.

A good business plan lives several years into the future. We’ve learnt from the last few years that we can’t possibly fully plan for everything, but business owners should have contingencies in place to prepare for curve balls. With that, heavily relying on one project or one team member to keep the company afloat is risky and flimsy. Projects can fall through for any number of reasons, including reasons that are out of your control; weather events, pandemics, contractor problems or B2B issues. Equally, star employees are a wonderful asset, but leaning too heavily on them to support the business leaves you very vulnerable. They can leave, and take clients and customers with them. If you’re finding you’re hinging significant hope on these unsustainable methods, you could be facing real financial difficulties ahead.

A normal and expected part of owning a business is debt. Typically, you’ve entered your venture with debt (a business loan) and your job is constantly in the pursuit of making a profit - funds available after debts are paid. You’ve likely had years of predictable and accounted for debts that you know you can handle. However, if you’re noticing that your debt demands are increasing at a rate you weren’t ready for (inflation, interest rate rises, supplier fee increases, unexpected revenue drops) and you’re unable to pay them on time, you could be heading toward insolvency. A sure fire way to know you aren’t quite keeping your head above water is an increase in creditor demands for payment by them, or their legal representatives.

These insolvency red flags are just that, red flags. There could be time to turn it around, or get ahead of the path to insolvency and set yourself up as best you can for it. Talk to our knowledgeable team today to discuss all the options available for your specific situation.