What are the warning signs of insolvency an accountant should be on the lookout for?

As an accountant, you’re the financial caretaker of the businesses under your care which means keeping your finger on the pulse and casting a close eye on financial health. While cash flow is an essential factor for any active business, if this falls out of sync, it could threaten viability and increase the risk of insolvency.

If an accountant raises the alarm bells pre-emptively, this could steer away potential hurdles, such as depleting cash flow, creditor pressure and mounting tax liabilities; all of which can seriously disrupt company operations and eventually push a business into the red.

A business on the road to becoming insolvent will often present warning signs before it runs out of cash or reaches a point of no recovery. Chelsea Williams, a company debt expert at Scotland Liquidators, part of the Begbies Traynor Group, works closely with accountants to help debt-ridden businesses navigate the company rescue or closure process. She shares what warning signs of insolvency accountants should be on the lookout for and why it’s essential to signpost clients towards insolvency help.

Warning signs of insolvency for accountants

A business on the brink of insolvency will more than often deteriorate at a gradual pace, rather than nosedive with little notice.  As accountants are positioned in the control room of a business, they are on the front line, and can therefore strategically identify the early signs of insolvency, such as:

• Borrowing as a lifeline – If a business mostly depends on multiple lines of credit as its primary source of funds, and will unlikely survive without it, it could accumulate a combination of short and long-term debts which could lead to a cash flow crisis.
• Cashflow crisis – Limited cashflow can exacerbate the financial health of a business as if it’s unable to afford basic costs to maintain company operations, the debts will build up, and so will the number of disgruntled creditors.
• Liabilities outweigh assets – If the debt-to-asset ratio is exceptionally high, the business may be unable to raise enough money to pay off its debts. This can create a long chain of problems as lenders may refuse or restrict borrowing to businesses with high debt-to-asset ratios.
• Long term creditors – If a business has long term creditors, this may show that it’s consistently unable to make debt repayments as it’s under financial distress. If there’s no prospect of clearing company debts, the long-term success of the business may be limited, and its viability brought into question.
• Long term debtors – A business with a track record of accumulating long-term debtors may signal deeper rooting issues with credit control practices. This may relate to a lack of checks, lenient terms, or a relaxed debt collection process. Long term debtors often fall into the bad debt category which means lost income for the business which can seriously damage its financial position.
• Overdue tax bills – The business will be held responsible for old and historic tax bills, so if these are ignored as they are unaffordable, the viability of the business could be brought into question by HMRC. They may issue a winding up order to shut the business down following suspicions that it is insolvent. HMRC will impose penalties and interest for overdue tax bills.

What insolvency support is available for my client?

If you suspect that your client may be at risk of insolvency, refer them to a reputable insolvency practitioner. Licensed insolvency practitioners are best positioned to advise business owners on business rescue methods, from negotiating payment plans with creditors and securing competitive business finance, to realising company assets and raising funds for debt repayments.