The latest government data has revealed a four-year high in company insolvencies. With an increasing number of businesses succumbing to heightened financial strains, our Business Recovery and Insolvency specialists highlight the early warning signs that your business is in financial distress and how you can recover from them.

According to the latest government statistics, company insolvencies in England and Wales experienced a 40% upsurge in May 2023 compared to the figures for May the previous year. Government data from the Insolvency Service also revealed that 2,552 companies entered insolvency during May 2023. As a result, company insolvencies have reached the highest level since 2019, highlighting the significant financial pressures businesses across the UK are currently experiencing

The Insolvency Service has stated that the rise was partly due to many of these insolvencies being creditors’ voluntary liquidations (CVLs).

However, further insolvency statistics detail that there were 189 compulsory liquidations in May, an increase of 34%, which the Insolvency Service related to the increase in winding up petitions presented by HMRC.

In addition, the number of businesses entering administration is also on the rise with 151 recorded in May 2023, 80% higher than in the same month the previous year.

These recent statistics show the harsh economic landscape that businesses in the UK currently face. With soaring interest rates, rising inflation and the increasing cost of energy continuing to take their toll, the future can feel extremely worrying for many business owners.

In this article, we take a closer look at early warning signs that your business is experiencing financial distress and how early intervention is paramount to survival.

Why do businesses get into financial trouble?

In most cases, there isn’t always a standout reason a business is struggling, but it is more likely to be an accumulation of several issues. Some common causes of financial distress include:

  • The rapid expansion of business operations
  • A lack of forward-thinking business planning
  • Ongoing management issues
  • Poor record-keeping or accounting
  • The loss of key staff members
  • Overtrading

Five signs a business is in financial distress

Acting early is key to your company bouncing back from financial difficulty and avoiding insolvency. Recognising any potential areas of concern and putting measures in place before it is too late will greatly increase the likelihood of recovery for your company.

But as a business owner, what red flags should you be looking for? Below, we have outlined five major signs that strongly suggest your company is experiencing financial distress and the common causes:

1. Declining or unstable cash flow

One of the clearest signs of financial distress for businesses is a consistent decline or unstable cash flow. When your business is struggling to generate sufficient funds to cover its costs, it may indicate underlying financial issues that require attention. A decline in cash flow can stem from numerous factors such as decreasing sales or excessive expenses that surpass the revenue generated.

Inadequate cash flow can hinder your ability to pay your business’ bills, invest in growth opportunities or meet short-term financial obligations. It is crucial for business owners and managers to closely monitor cash flow and implement strategies to improve it.

2. Redundancies, downsizing or low employee morale

Financial difficulties often prompt businesses to resort to cost-cutting measures, which may include reducing their workforce through a redundancy programme.

Laying off staff and downsizing can have a profound impact on your employee’s morale, productivity and overall company culture. In addition, downsizing can often lead to an increased workload for your current staff and create fears about job insecurity. This may result in lower employee satisfaction.

If your business is facing financial challenges, you should prioritise effective communication with your employees and explore alternative cost-saving measures where possible. Upholding a supportive work environment can help to support your employees’ morale and keep them engaged with your company during challenging times.

3. Reduced profit margins

A reduction in your profit margins, especially over an extended period, can be indicative of financial distress. Generally, profit margins reflect the efficiency of a business’ operations and its ability to generate profits from its sales. A consistent decline in your profit margins suggests that your business is facing challenges in maintaining profitability and may struggle to cover future costs.

Factors that may be contributing to your declining profit margins could include:

  • intense competition
  • rising costs (such as materials or labour costs)
  • inadequate pricing strategies.

4. Growing debt levels

The mounting of debt should set off alarm bells that your business is struggling. While debt can be a useful tool for growth and expansion, excessive reliance on borrowing is unsustainable. If a business is consistently borrowing to sustain its operations or meet its financial obligations, it may struggle to generate enough cash flow to service its debt.

Elevated levels of debt can lead to increased interest payments, reduced borrowing ability and potential credit rating downgrades, making it harder for you to access additional funding for your business in the future.

You should carefully manage your debt levels and explore options to reduce company debt through strategies like debt restructuring or seeking additional equity financing.

5. Increasing accounts payable and delayed payments

If your business has started to delay payments to suppliers or is experiencing a significant increase in its accounts payable, this should trigger a warning sign. These actions could result from cash flow constraints or an inability to manage working capital effectively.

Delayed payments and mounting accounts payable can strain relationships with your suppliers, leading to potential disruptions in your supply chain and reduced access to crucial goods and services. You should actively manage your accounts payable and ensure prompt payment to your suppliers.

Overcoming financial distress

It is imperative for businesses experiencing financial distress to address their issues early on to avoid further difficulties and increase their chances of recovery.

For businesses experiencing significant financial strains, it is easy to fall into a disaster management mindset, especially where the prospect of recovery can seem unachievable. However, financial difficulty does not always have to lead to insolvency.

Unfortunately for owner-managers of a distressed business, the recovery process can take time and demands perseverance, but with diligent execution of appropriate strategies, you can overcome financial challenges and position your business for long-term success.

Is your business facing financial difficulty?

At PKF Smith Cooper, our business recovery and insolvency services are prevention-centred as opposed to strictly remedial. By adopting a holistic and initiative-taking approach from the outset, our team of business recovery and insolvency experts will conduct a thorough assessment of your business’s financial situation and develop a comprehensive recovery plan tailored to your specific circumstances.

Taking advice at an early stage will avoid unwelcome interventions and solutions being imposed on your company and increase the options available to business owners.

If your business is struggling to cope with its financial demands, get in touch today and we will help your business thrive not just survive with professional business recovery support.