The number of insolvencies in the UK has reached its highest point in 30 years, and experts anticipate that more businesses will shut down due to increasing inflation and persistent supply chain issues. During this time, it is essential to keep track of indications that business customers might be encountering difficulties and act quickly when signs occur that a company may be at risk of shutting down.
Implementing preventative measures at an early stage can ensure businesses are aware of the current circumstances and buy some all-important time to make improvements, providing them the best chance of improving their financial situation.
Early Cash Flow Worries
Typically, inadequate cash flow is one of the primary signs that a business is experiencing financial difficulties. If businesses are defaulting on their bills or having to negotiate extended payment terms with creditors, most likely they are experiencing financial challenges. Addressing these signs early on can be key in avoiding potential financial crises and safeguarding the interests of the company. One common sign to pay attention to is significant changes in the volume or rate of orders. Insufficient communication with suppliers can frequently be the cause of this issue, and a sudden decrease in orders could signify cash flow problems or internal disruptions and uncertainty. Persistent delays in promptly settling invoices with suppliers can also indicate inadequate cash flow.
If your client is not working with a well-known lender, it’s possible that they’re paying a higher rate of interest. This could suggest financial instability. You can find such information on Companies House under the ‘Charges’ tab.
Potential Indicators
Alongside this, there are additional factors that could contribute to signs of business stress. Restructures and changes in strategy can be an indicator of financial trouble. This often manifests in changes in key personnel or leadership and suggests internal disruption with a company’s current course. Another obvious sign is inconsistent or evasive communication. If a company is not transparent in their communication or provides unclear explanations regarding payment delays or financial matters, it may be necessary to investigate further. This is especially important if there are indications that the company may be trying to conceal financial difficulties.
Credit Limit Red Flags
For credit controllers, monitoring clients who are nearing or surpassing their credit limits is key. This includes staying up to date with their payment schedules. Although infrequent breaches may not be alarming, persistent breaches require much needed attention as this could be a sign of overextension or liquidity issues. This operates in conjunction with payment delays or defaults, as well as an increase in either debtor or creditor days. If a business extends payment timelines or requests a change to credit terms, it can cause certain suppliers to stop providing essential components and again indicates financial difficulties within the business. If a payment cannot be efficiently pursued, it may signal potential cash flow issues in the future and credit controllers should carefully investigate any abrupt fluctuations in these figures as they may indicate underlying issues.
To conclude, there are multiple signs that can help to predict late or non-payments from businesses struggling to maintain cash flow. By being able to identify these indicators and trends, credit controllers can take prompt action and initiate transparent and timely dialogue to prevent the debt from becoming irrecoverable. Having a thorough comprehension of the financial situation is crucial in order to provide a tailored approach that can prevent, in a worst case scenario, a chain reaction of insolvencies
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