Keep an out out for the warning signs of a business in distress
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Business recovery 1: How to spot the warning signs


Over the last 18 months, Covid-19 has affected every area of our lives. Now it is starting to feed through to an increase in company insolvencies. In the first of a three-part series in association with Sage, Carol Baker offers practical advice on how to support clients at risk of failing.


9th Aug 2021
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“The goal of any business is to make money by increasing net profit, while simultaneously increasing return on investment and simultaneously increasing its cash flow.” EM Goldratt, The Goal (1984)

If only things were that simple.

Latest figures from the Insolvency Service show that in the first six months of this year there were 5,869 corporate insolvencies and that figure is on the rise.

As Colin Haig, President of insolvency and restructuring trade body R3 and head of restructuring at Azets explains, “There were just over 4,600 fewer corporate insolvencies between 2019 and 2020, and both the first and second quarter’s corporate insolvency figures for this year are much lower than in 2019.

“Based on this, we estimate there have been around 7,500 fewer corporate insolvencies over the last 18 months than we would normally see. This is largely because of the government support measures, which have been a lifeline for many businesses. But we expect corporate insolvencies to increase as they wind down.”

With the end of furlough and prospect of Covid-19 support loan repayments hovering on the horizon for nearly 1.7m businesses, the demand for business recovery support is forecast to explode in the months ahead.

As a trusted business adviser, now is the time for accountants to start examining the financial health of businesses that have relied heavily on government help during the pandemic. The earlier you intervene when a company goes into decline, the better the chances of bringing it back to health.

Warning signs

Modern accounting technology is a great tool to help the accountant spot the warning signs when a company is struggling.

Accounting systems generate a wealth of information on sales and cash management by linking the books to live feeds of current bank accounts. Staying on top of these figures can highlight problems before they have a chance to take hold. For example, how long it takes a client to recover when they suddenly incurs a bad debt from a customer with a low credit rating. Or comparing monthly variances in the accounts to assess the change in business income due to Covid-19 effects.

Here are some of the key strategies to suggest if you spot any danger signals among your clients

1. Get cash into the business – fast!

Companies need cash for their survival and growth. A business fails when it runs out of cash and it is deemed insolvent when essentially it is unable to pay its bills when they fall due.

Vital working capital is tied up in the sales ledger, yet many businesses feel less confident in demanding payments from customers for fear of losing future business, so they delay chasing debts.

It is therefore imperative for businesses to tighten up their credit management and collections activities. Start by enforcing better payment terms with customers. Either offer prompt-payment discounts or remind customers that all invoices not paid promptly will be subject to late payment interest and compensation charges under the Late Payment of Commercial Debts 1988 Act.

2. Use factoring or invoice discounting

Cash pressures can be eased by using invoice finance techniques such as factoring or discounting services.

With factoring, the factor agrees to pay 80%-85% of approved debts as soon as they receive a copy of the invoice. They undertake all credit management and collections activities on your behalf. While factoring is common in some sectors such as logistics, the downside of this approach is customers become aware you are using a factor, unless they can see you are using it to fund expansion, they will assume the business is desperate for cash.

For companies using invoice discounting, 80%-85% of cash is available immediately for approved invoices, but all collections activities continue to be carried out by the company and the service is usually undisclosed to its customers.

If an invoice is not paid, then both the factor and/or the invoice discounter will reclaim its money from you.


Overtrading is a growth problem and happens when the company is growing faster than the cash resources needed to fund it. Overtrading is seen most often when the company persistently uses its bank overdraft facilities, especially when the business is offering better credit terms to its customers than it receives from its suppliers; and when there is a large increase in stock and creditors.

Addressing the overtrading problem relies on having a tighter control of the money going out of the business, so a company will need to:

  1. Obtain better payment terms from suppliers
  2. Enforce payment terms promptly
  3. Reduce inventory levels
  4. Lease rather than buy assets
  5. Cut costs and improve efficiency to achieve greater profit; and
  6. Inject new capital (ie put money) into the business.

Other factors

If a business is not under effective control and managers do not have the skills to manage all the components of the business, it will fail.

Major litigation cases such as an alleged patent infringement or health & safety compensation claim, can also impact on a company’s survival.

Likewise, dishonest employees can undermine a company’s ability to survey through crimes such as invoicing fraud, where they submit fraudulent invoices to the company for payment.

While these factors have the potential to bring down a company, the business will reach crisis point when:

  • To conserve cash and in order to pay staff, directors who normally take a wage stop taking their monthly salary. By the time this happens, most directors would have already provided personal guarantees to the bank, remortgaged their own homes (so that they can put cash into the business) and may well be living on personal credit cards for day-to-day expenses - all stressful factors that can affect directors’ health. For accountants, directors not taking a wage is one of the easiest red flags to spot and is a reminder that should the company collapse, the company is not the only thing that the directors are going to lose.
  • The company is actively delaying payments to creditors or making payments on account to stave off cash flow problems.
  • Suppliers demand payments up front or place the business on stop until payments are made
  • Statutory payments (PAYE, VAT) are in arrears. This could be due to inaccuracies in accounting, or as many accountants know, more commonly down to HMRC errors which have arisen through no fault of the business. The problem arises when HMRC then wants to be paid promptly and the business doesn’t have the cash to hand to pay.
  • The bank is threatening to stop, or has stopped payments because the company’s overdraft is over the limit.

But what ultimately sends a company into a downward spiral to the insolvency trap door is:

  1. Lack of cash – with enough cash a business can normally buy itself out of a situation – if only in the short-term giving it breathing space to put in remedial measures
  2. HMRC bailiffs arriving at the business premises to take possession over the business’ assets, or legal pressures such as a county court judgment or a winding-up petition issued against the business.
  3. Banks freezing the company’s accounts. In addition to formal proceedings, rumours can play on the concerns of banks. Once loan conditions are breached or the bank loses faith, directors will struggle to source independent funding from other lenders for the company’s survival.

That is why it is so important for accountants in practice to intervene and/or seek advice for their clients at the right time. It’s not enough to give advice in an emergency situation, you need to get the client to listen.

The accountant’s role

For in-house accountants, you are in the key position to spot the warning signs well before the senior managers.

Many businesses could be saved by inviting an insolvency practitioner who specialises in turnarounds in for an informal chat well before the warning signs have had a chance to take hold.

But if you fail to spot the warning signs, what happens next becomes a race against time. Then the question then becomes, “Can the business be saved?” We will discuss this in article 2 in our Vusiness Recovery series - turnaround options.

Sage Accounting is perfect for accountants and bookkeepers small business clients. Get started now

Replies (5)

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By ireallyshouldknowthisbut
09th Aug 2021 17:35

Factoring is just about the best way to kill off your business by often running at a loss once you are losing 10-15%+ of your margin for the sake of a couple of weeks of cashflow.

You are almost always going to be in a much stronger position by shortening your cash cycle than throwing in your lot with the Factoring vultures. Its very hard to then rescue the business once you are signed up with them. I recently reduced a clients cashflow cycle by 60 days simply by improving the timing of their billing from "when we get round to it" to "month in advance". Customer fall out was negligible and they no longer have an overdraft. Bad debts should drop too.

Thanks (4)
Replying to ireallyshouldknowthisbut:
By Hugo Fair
09th Aug 2021 18:55

Totally agree ... particularly that once started, it's almost impossible to extricate your company from factoring. In that sense it's like a hard drug addiction!

I once introduced a simple 'bonus' scheme for a book-keeper in her credit-chasing capacity ... basically 1% of margin for cash collected within the 30-day terms. In a £ 1/2m company she is now used to getting an extra £3+k p.a. - and the company is used to having average aged debtors of under 40 days, with the bulk of those under 30 days. Win-win!

Thanks (1)
Replying to Hugo Fair:
By Rgab1947
10th Aug 2021 09:35

Did that for my own practice when debtors book and overdraft were very high. Within 3 months low debtors book and no overdraft.

One client remarked he was waiting for me to chase him (He had the funds) as a test of my management.

Thanks (0)
Replying to Rgab1947:
By Paul Crowley
10th Aug 2021 13:35

businesses that ignore the invoice and expect statements really are encouraging the debt collection fees that can be added
If a client told me that story then I would change the billing dates

Thanks (0)
Carol Baker
By Carol Baker
13th Sep 2021 17:49

Factoring is one of the subjects we will be covering in a future article. In particular, we will be looking at what accountants need to look out for when dealing with factors and invoice discounters. Do check out the second article in the series that looks at Turnarounds ( – all comments welcomed.

Thanks (0)