There are many potential signs that a company is in trouble. Some of these should be an indicator to the directors but some will be apparent to customers and companies extending credit as well. If any are pertinent to your company you should seek advice from our turnaround specialists.
- The overdraft is always at the limit.
- The bank always wants more information.
- The bank has returned cheques.
- The bank has refused to increase the overdraft or wants its facility reduced.
- The bank refuses to provide a term or EFG loan.
- The bank wants to introduce investigating accountants for an independent business review. Note, the banks typically use the “big six” so fees, which are paid by the company, can be very significant.
- The bank asks for increased security.
- The bank wants personal guarantees or increase them.
- The bank wants a charge on personal property.
- The covenant with the bank is often contravened.
Reporting – warning signs
These can and are monitored by credit agencies, suppliers and banks
- The business has not filed the company’s accounts on time at Companies House and has incurred a penalty.
- The business has not filed the company’s annual return at Companies House.
Creditors – warning signs
Suppliers experiencing these symptoms in dealing with a firm will mark the client as high risk.
- Cash flow always tight so paying creditors is difficult. Creditors often phone for payment.
- Inefficient production – getting stock is difficult because creditors are not paid on time.
- Stock arrives late because deadlines for payment of supplier accounts are missed.
- Impossible to get new credit or extend existing.
- The company’s creditor days growing.
- Payment terms are often exceeded.
- The business has lots of red warning letters.
- The business has had lots of legal actions or CCJ’s registered.
- The business is “Peter & Pauling” – using lots of suppliers and spreading credit around.
- The directors are always fighting creditor fires and having to handle creditor’s calls every day.
- Suppliers can’t obtain trade insurance against your company.
- The company often is late paying HMRC.
- The business has had visits by Sheriffs or bailiffs.
These are often a symptom of inefficient operations or a cause of cash flow difficulties.
- Debtors don’t pay on time.
- The business doesn’t know what its total debtors are.
- Debtor days are over 85 days.
- The company has concentration in 1 or 2 major customers (debtors).
- The accounts department only invoices periodically. No dedicated debtor collection function.
- The business doesn’t want to issue too many credit notes – although you know the goods supplied have been faulty, returned or under agreed quality.
- Amounts owing by them are not known or the company does not know how much is owing to the factor company.
- The factoring company is reducing the advance.
- We can never get enough advances against our invoices.
- They are advancing 75% against invoices but disallowing lots of invoices.
- They claw money back after the debtor has not paid in less than 90 days.
Causes of a Company being in trouble
- Declining demand for products and goods offered
- No or poor sales activity
- Reliance on a few large customers (Who may also be experiencing difficulties in adverse economic environments)
- Adverse economic environment
- Inadequate capital
- Fast growth (Over trading)
- Not knowing margins or “buying” sales
- Not having financial information to make sound decisions on
- Single channel expertise. E.g an engineer not understanding sales/marketing
- No planning or budgeting.
There are other causes such as a large bad debt, but these are the most common.