For this article, we invited expert Graeme Lipman at Begbies Traynor to contribute.

When a business is beginning to struggle, it is often the case that it starts to exhibit varying signs of this impending trouble both internally and externally. When a business is in distress it often impacts on the entire operations of the company, meaning the symptoms can be seen throughout the business ranging from deterioration in staff morale, the physical appearance of its premises, through to its ability to manage outstanding creditors.

Hard signs v soft signs

The key indicators that something is not well with a business can be grouped into two distinct categories, ‘hard’ and ‘soft’. It important to know that hard signs are not necessarily more serious than soft signs, as both are more than capable of destroying a business. Instead the distinction comes in how these can be qualified. Hard signs tend to be financial signs of trouble and are difficult for a company director to ignore or deny, whereas soft signs are typically behavioural responses resulting from the stress of running a struggling business.

Taking note of the early signs of business distress is vital, and you should be vigilant in spotting them as soon as possible. By this same token if you are looking out for these signs, chances are the company’s clients will likewise be taking note and watching the businesses they deal with closely. Once a key customer is aware of these issues it is likely that they will take steps to minimise any potential risk and shield their own company from these problems as much as possible. This could result in harsher payment terms being imposed from suppliers and reduced orders from customers. It goes without saying that this can be disastrous to the viability of the company in the long-term.

Understanding ‘hard’ warning signs

Hard warning signs are those which are tangible and typically tend to be of financial. These include falling behind on payments to HMRC and other trade creditors, being issued with a CCJ, or suffering a bad debt from a major customer. Some hard warning signs are directly related to how the company manages its existing credit facilities including requesting an increase on existing accounts, drawing down the maximum amount of funds possible, or having the business’s credit limit reduced. Should any of these things seem familiar, swift action should be taken to get to the root of what is causing these issues.

Other hard warning signs you should be on the lookout for include:

  • Losses being made
  • An increasing debt turn
  • An increase in creditor days
  • Stock holding growing – potentially obsolete stock
  • Returning items on bank statement
  • Credit rating/credit insurance limit reduced
  • No recent accounting or management information
  • No forecasts or KBI monitors
  • Breached covenants on facility
  • Redundancies
  • Taking on low margin/loss making business

Understanding ‘soft’ warning signs

Soft warning signs are different. Rather than acting as solid financial proof that a business is in trouble, they are instead a series of reactions typically caused by the company’s current situation. These include things such as a director not answering the phone, creditors finding it increasingly difficult to get in touch with the company, and a director being in denial over the state of the company and instead looking to attribute any failings to someone or something else. A breakdown in management team, tensions with internal and/or external stakeholders, plus staff departing the business at an above average rate should never be ignored as these are often manifestations of deeper issues with the company. Other ‘soft’ signs to look out for include:

  • Owners looking to “sell the business”
  • Decline in quality of information supplied – if any
  • Lifestyle business and continuing to take large remuneration when trading declining
  • Additional funding – time critical finance
  • Excessive optimism despite signs to the contrary.

Being aware of the warning signs is vital as when it comes to saving a struggling business, time is everything. It is not enough just to recognise the signs, but to act on them once they become clear. The earlier action is taken, the more options will be open to the business including a variety of rescue, recovery, and restructuring methods. Left too late, however, and it may be that closure is the only viable way forward.

Next steps

If you can identify with some of these warning signs and your business is struggling, the expert team at CRM can provide advice or if necessary arrange a free consultation with Graeme Lipman at Begbies Traynor, the UK’s leading insolvency practice.

 

 

 

 

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