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Company Insolvency – the Warning Signs

Review the List and take the Insolvency Test

When we are looking to diagnose the financial health of a company we look at the issue from a couple of different perspectives. We recommend that a director use our Online Assessment Tools such as Ask IRA and Is my Company Insolvent?

Another way of looking at the issue is to look at the classic Warning Signs of insolvency. Companies suffering financial distress have identifiable characteristics. It’s fair to suggest that all businesses will exhibit some, or even many, of these characteristics from time to time. If you’ve got just a few of the characteristics you are probably OK, but any more than that and you need to be concerned.

Creditors – Warning Signs

  • Cash flow is always tight so paying creditors is difficult.
  • You can’t get stock because you can’t pay creditors on time.
  • You cannot get new credit.
  • The company’s “creditor days” are growing.
  • You have lots of failed deals with creditors.
  • You have lots of red warning letters.
  • You have had lots of legal actions.
  • You are always fighting creditor fires and have to handle creditor’s calls every day.

Debtors – Warning Signs

  • Debtors just don’t pay on time.
  • You don’t know what your total debtors are.
  • “Debtor days” are over 85 days.
  • Your company has a concentration of its business in one or two major customers.
  • You do not have a dedicated debtor collection employee or service.

The Bank – Warning Signs

  • Your overdraft is always at the limit.
  • Your bank always wants more information.
  • Your bank has returned cheques.
  • Your bank has refused to increase your overdraft.
  • Your bank refuses to provide a Loan.
  • Your bank wants to introduce investigating accountants.
  • Your bank asks for increased security.

Director behaviour – Warning signs

  • Fire fighting – you don’t get the important work done because you are dealing with problems.
  • You receive a lack of management information or wrong information.
  • “Compartmentalising” problems – you deal with one creditor problem and ignore others.
  • You don’t have a business plan.
  • You don’t have regular team, management and board meetings.
  • You believe that one more sale, one more contract, one big customer payment will solve the cashflow problem.
  • You have a large director’s loan account.

Management Style – Warning Signs

You and management don’t know key statistics of the business such as:

  • Gross Profit.
  • Costs.
  • Sales per month / per annum.
  • Where 80% of work comes from.
  • Where 80% of profit comes from.
  • How many units of your product you make per day.
  • How many enquiries you convert into sales.
  • Your sales performance compared to last year, last month and budget.

Systems – Warning Signs

  • You don’t produce monthly management accounts.
  • “MYOB” or a similar computerised accounts package shows negative balances in assets or liabilities.
  • You have a computer generated profit and loss but a handwritten balance sheet.
  • Constant returns, faults and disputes with debtors.
  • Things always going wrong.

People – Warning Signs

  • High staff and management turnover.
  • Internal political issues causing difficulties.
  • Your team always seems demoralised.

Related Topics

If the above advice has not answered your questions you might want to review the following pages and downloadable Information Sheets:

Or please call us for free advice.

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Ask IRA!

Our Interactive Restructuring Adviser

Answer 4 questions and IRA will:

  • Diagnose the problem
  • Prescribe the Right Solution

Is My Company Insolvent?

Tick the boxes to check if you are at risk of:

  • Insolvent Trading
  • Personal Liability for Company Debt