"By failing to prepare, you are preparing to fail." – Benjamin Franklin
It's never easy to spot these warning signs, which is why I decided to write this article! As a business owner, it is essential to always be prepared for the worst. Even if your business is going well, you still need to be aware of the warning signs - in case they come up in the future.
Before I get to the 'red flags', I need to stress the importance of staying positive through rough times. Yes, I know – it's easier said than done. However, if you manage to keep your cool and continue to have a positive outlook, you'll be able to learn from your mistakes and therefore improve. You need to analyse what went wrong and make sure you won't make the same mistakes in the future.
"You know what 'FAILING' stands for? It stands for 'Finding An Important Lesson, Inviting Needed Growth." – Gary Busey
If you can recognize the majority of the following symptoms then it is likely your business is under pressure, at risk, or it could be insolvent. Look through these signs, print off this page and tick those that apply. If you get an uncomfortable feeling that these warning signs are familiar, then find out if your business is insolvent.
And without further ado…here are the ten most important warning signs:
1. The bank is acting suspicious and wants more information from you
There's always a reason behind this! Banks have quite sophisticated systems for monitoring this risk, but often they are "in the dark" with regard to the up to date financial performance of the company that owes it the money. One way of addressing this is to demand (as their borrowing conditions usually allow) detailed and up to date information from your company.
2. Your bank wants to introduce Investigating Accountants
When a business has financial or operating difficulties it can often breach its borrowing facilities from the bank or from factoring companies. This can lead to bounced cheques, problems with the payments of direct debits, missed loan repayments and generally builds pressure on the cash-flow.
If banks fail to get any information whatsoever from you (see warning sign 1), then they will worry that old and out of date information is being used to run the company and their lending could be at more risk. You may have noticed by now that banks do not like taking chances. So the next remedy is to insist upon the introduction of investigating accountants. This will normally be paid for by the company, thus the act of appointing investigating accountants could lead to further breach of the facilities!
3. You are always at the limit of your overdraft
You need to keep in mind that an overdraft should only be a short term solution for borrowing and/or emergencies (expenses that are higher than expected, such as bills). Why? Because an overdraft is not guaranteed, the bank could take it away at any time.
Lots of businesses treat the overdraft as a budget or a spending limit rather than a last resort. It’s all too easy to become complacent and depend on your overdraft – you will only end up paying high fees which is not something you would like to be doing over the long term.
When dealing with an overdraft, it's good practice to read the terms and conditions, bank letters and to always seek approval before you extend your overdraft.
4. Need to borrow more and more money to cover shortfalls/debt
This one is self-explanatory – as mentioned above, make sure you always seek approval before you extend your overdraft.
5. The bank won't provide you with a loan
It can be extremely difficult to get a bank loan, especially cheap loans. The same applies to loan companies. However, don't despair! It's always been tough – it takes time to build good credit, it just doesn't happen overnight. It's a very slow process that can take years, if you have been told different then I'm afraid you have been lied to.
6. Missed annual filing of accounts at Companies House/received penalties
Late filing penalties were introduced in order to encourage directors of companies to file their accounts and reports on time, because this information is required for the public record. All companies must send their accounts and reports to Companies House every year. If you're late with your reports then the law imposes an automatic penalty.
7. Management issues
Management problems are far more common than you would think. Take a look at a few classic examples:
- failing to organize regular meetings with staff and the board ;
- blaming everyone in the company but themselves;
- focusing on the wrong issues;
- conflict and stress in the workplace;
- not a fan of change;
- lack of innovation;
- poor project management;
- failing to adapt quickly enough.
This normally happens when the systems are outdated which makes it harder for directors to stay in touch with what's happening in their own organisations. In some cases, directors and management don't know the accounts, cash-flow, gross profits, sales, etc. This can be explained by poor research and marketing strategy.
9. Legal actions against you (CCJs etc.) or threats from creditors
Generally a creditor will not apply to the court for a CCJ unless you are severely delinquent in paying your debts and they have tried repeatedly to get paid. However, if they have not been satisfied that you want or intend to pay your debts, they have the right to ask the court to issue a county court judgement that will order you to pay your debt.
10. Unable to pay creditors because you have cash-flow problems
A director's main duties include avoiding late payments. Too often a business will get excuses like ‘the cheque is in the post', 'our system is down' or 'we haven't received the invoice'. Too often a business will struggle with cash-flow as a result of late payment from customers or a supplier.
Time to take action
Now it's time for you to decide whether or not these 'red flags' apply to your business. Afterwards, you need to understand why things went wrong. What could you have done differently? What can you do in future to make sure you avoid these mistakes? This is a good opportunity to potentially improve your business in the long run and also expand your knowledge on how to deal with these difficult issues in the future. You have probably noticed that I used the word 'potentially'. Why? Because it's up to you if you want to learn from this experience. Make sure you make the most of it, learn how to turn a negative into a positive!
Moving forward, it might not be too late to find a solution before creditors take legal action. However, it is essential to know when to throw the towel in. If you think your company is not viable and you don't want to keep trading, you must act in the best interest of your creditors and not you and your shareholders. This leads to liquidation. Watch this video to understand about liquidation better.
I hope this article has given you a clear indication as to where your business is heading. Remember to act accordingly and to stay positive. This is the pathway to learning, improvement and, therefore, success!
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Author Bio
Claire Moore is a Marketing Executive for the KSA Group and a contributor to www.companyrescue.co.uk, based in the City of London. KSA Group are corporate recovery experts and licensed insolvency practitioners. Claire has a huge passion for business and finance and enjoys writing about these subjects.
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