warning sign

What is insolvency, and what are the warning signs?

In short, insolvency refers to the inability to pay one’s debts as they fall due. It’s therefore very important to know if your business is insolvent or likely to become so if you continue to trade, as there are potentially harmful implications for directors who trade while insolvent (find out more about this here).

Why do businesses fail?

As insolvency practitioners, we are often asked for the top reasons businesses fail, so the first point we want to make is that hindsight is a wonderful thing. When reflecting on events leading to the failure of a business it’s easy to be self-critical. The truth is, business owners are human beings who attempt to make decisions based on historic and current information, to meet a future need or opportunity. Therein lies the problem! Just like weather forecasting, we can have all the experience and data in the world, but we can still get it wrong. Sometimes spectacularly!

The key warning signs…

An under-performing business can quickly slip into distress, so it’s important to look out for the key signs and then promptly seek expert advice…

1. Lack of working capital

Insufficient funding to meet ambition is an extremely common problem. The greatest idea, supported by the most robust of plans, cannot be implemented without the necessary funding.

2. Regularly defaulting on bills

Everyone misses a payment or forgets a bill occasionally but if this starts to happen regularly it can be a sign that your business is underfunded, isn’t chasing its debts properly or is heading to liquidation.

3. Extended debtor or creditor days

Taking longer to pay creditors or collect money from debtors can be a sign of something more serious.

4. Falling margins

Falling margins suggest that costs are too high and prices or income are too low. This is not a sustainable position.

5. Cash flow issues

A constant lack of cash should ring alarm bells. All of the above feeds into good cash flow management. Every business has times where cash is tight, but if this becomes a constant problem then your business could be in trouble.

6. Insufficient information

Insufficient or poor information, which leads to bad decisions. To make the right choices you need access to relevant and up-to-date information, both financial and non-financial and from both inside and outside of a business. Examples include management accounts, market data, customer surveys, competition reviews, etc.

7. Industry changes/product innovations that threaten your business

We’ve all seen whole industry sectors come and go, either through innovation, or migration to other parts of the globe where they enjoy better trading conditions. The pace of change is fast, unstoppable and sometimes unpredictable. Change is also driven by developments in law or government policy. Examples include the smoking ban and both the introduction and recent withdrawal of government incentives for renewable energy.

8. Misreading the economic cycle

Timing is everything, and creating a business not suited to the current and near term economic climate leaves it exposed to failure.

9. Unhappy directors

Unhappiness is an important sign, as businesses in distress are rarely happy. If key staff members are leaving and you and your managers are urgently makinghttps://babr.co.uk/our-team/ money-saving cuts or changing strategies suddenly, then you need to seek help.

10. Other common contributors

Other common contributors to failure include inefficiency, increased local competition, poor customer service, lack of clear vision/strategy, poor leadership, disputes and poor pricing.

Common potential insolvency scenarios

Here are some scenarios we regularly see…

Scenario 1: problems paying bills

  • You’re unable to pay creditors on normal terms, but they’re currently happy to extend credit;
  • You cannot pay your taxes on time but have agreed a payment schedule with HMRC;
  • You’ve exceeded your credit limits with key suppliers but have managed to gain credit elsewhere.

If this sounds like you, it seems like you’ve found a way to manage in the current situation, and can continue to trade without a massive risk to the company. However, it’s important to keep your company under constant review and act quickly should things start to change.

Scenario 2: struggling to get credit

  • You’re only able to get credit from new sources and are having to use this to keep current creditors happy;
  • Creditors have started to threaten legal action;
  • You’re falling behind on tax payments and have not agreed a payment schedule with HMRC;
  • You can’t accept new orders.

If this sounds like you, we would recommend contacting an Insolvency Practitioner for advice.

Situation 3: you cannot get credit

  • You’re on stop with most/all of your suppliers and can’t get further credit anywhere;
  • You‘re receiving final demands for payments;
  • It’s starting to take a toll on your mental health.

If this sounds like you, stop trading and seek advice from a licensed Insolvency Practitioner as soon as possible.

Sound familiar? Then act quickly

The sooner, the better, when it comes to getting advice

If any of the above are relevant to your business situation then don’t delay in tackling it head-on by seeking early advice and support. The best thing to do if you’re worried about insolvency is to reach out to a licensed insolvency practitioner for advice. The sooner you seek advice, the more options you will have available to you, including the potential to avoid a formal insolvency procedure.

At Bailey Ahmad, we offer free and confidential consultations with no obligation to proceed. We will listen to you, take the time to understand you or your company’s challenges, and offer honest and practical advice. We’re licensed and regulated by the Institute of Chartered Accountants in England & Wales and are also firm members of R3 (The Association of Business Recovery Professionals), so you can have absolute confidence that you’ll be receiving advice from trusted, qualified professionals.

What is a formal insolvency procedure and do I need one?

Creditors’ Voluntary Arrangement (CVA)

This is a solution for viable companies that are struggling to pay their debts. It is a formal agreement between a company and its unsecured creditors whereby the company commits to pay back all or part of its debts over an agreed time period. Find out more about a CVA here.

Creditors’ Voluntary Liquidation (CVL)

This is a solution for companies (and LLPs) that are in financial difficulty, unable to pay their debts, and where there is no chance of recovery, despite the best efforts of the company directors. Find out more about a CVL here.

Members’ Voluntary Liquidation (MVL)

This is a solution for a company that’s fulfilled its purpose, has stopped trading, can pay all its debts in full, and allows the company’s shareholders to realise their investment in a tax-efficient way. Find out more about an MVL here.


This is a formal insolvency procedure available to an insolvent (or soon to be insolvent) company. An IP can be appointed as an administrator, and their aim is to rescue the company as a going concern. They’ll look to achieve a better result for creditors as a whole than would be likely if the company was wound up, and realise property to make a distribution to secured or preferential creditors. Find out more about administration here.

So, in summary, if you need help finding a solution for a financial problem, be that recovery, restructuring, insolvency or restarting, please get in touch with us today. The sooner you seek help, the more options you’ll have, so don’t delay. All consultations are free and confidential with no obligation to proceed. We will listen to you, take the time to understand your situation, and offer you simple, professional advice so you can plan