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Early warning signs that your client is in financial trouble

I often see companies needing insolvency advice because of a bad debt and the domino effect it has on cashflow. It’s frequently the case that businesses which lose a big customer do not survive and it is important not to ignore the signs that a customer may be in financial trouble.

As the Government reduces the support schemes in place, and now that the VAT payment holiday has ended, we are likely to see the full impact that COVID-19 has had on businesses. Whilst it may not be the same in every case, often there are warning signs that a company is in financial distress.

Missed or late payments

The most obvious sign that a company is facing cashflow difficulties is when they fail to make payment on time. Whilst some customers may be helpful and explain that they are unable to make a payment, don’t be fooled by empty assurances and lured into a false sense of hope that you will eventually receive the cash. Cashflow difficulties don’t tend to disappear overnight. This is especially important if you supply the customer on a regular basis, as you may be in the same position the following month but will be owed double the amount.

Changes in senior management

The Trekkies amongst us may recognise the quote “No ship should go down without her Captain.” However, this may be easier said than done when facing disagreements at the workplace, as managing a business facing financial and operational pressure commonly leads to internal disputes between senior management. Another important sign that things are not smooth sailing for a company is when there are multiple director resignations or when senior employees start leaving the company. This can often be an indicator that directors do not wish to be associated with a failing company and so it’s important to keep an eye out for changes in management.

Late filing of company accounts

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You may have recently seen the list revealed by Companies House of the most bizarre excuses given for not filing accounts. The excuse of “I was a huge fan of Kirk Douglas and was very upset when he died” may have been an actual reason but, in reality, managing a company without financial information is like driving a car with your eyes closed! There can also be many other reasons why a company is unable to file accounts, such as the lack of funds to pay their accountant or poorly kept financial records.  It is therefore important to monitor your customers and any filings made at Companies House.

It is not uncommon for companies to hit bumps in the road and, although cashflow difficulties may be temporary while the company awaits further investment or funding, it may also have long-lasting implications if one or more of the above scenarios are not acted upon in order to safeguard the stability of your own business.

Even businesses with the most up to date invoice processing systems are not exempt from these scenarios. It is important to be pro-active in these situations and take prompt action to recover any outstanding sums and seek appropriate advice in respect of your options. You will never completely eliminate the risk of bad debt but being aware of the signs will minimise your exposure.

MENZIES BUSINESS RECOVERY TEAM

Our Business Recovery team are on hand to offer practical support and advice to help you proactively manage your situation. Remember early engagement is key so if you are at all in doubt about the future of your business, please do get in touch with us.

For further information on this article, or to discuss your specific circumstances with an Insolvency Practitioner, please contact our business recovery team below.

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