Is your business going through a bad patch or insolvent? – Red light and green lightsPosted: Aug 31, 2022

Green, amber, and red lights of insolvency

If we were to make a list of things that directors usually tell us when we are helping them through the insolvency process ‘I wish I had realised how bad it was, sooner’ would certainly be on it. In our long experience of working to help businesses recover from financial problems, or dealing with their insolvency when that isn’t an option, we have seen hundreds of instances where earlier action would have made things less difficult. So, why does this happen? Why do directors often not see the reality or continue to think things will improve well beyond the point where they should act?

When there is a financial issue in a business, directors need to make decisions in a logical and impartial manner. This is very hard to do, and we have real empathy for them. Firstly, in a financial crisis directors are expected to be impartial about something they have poured their heart and soul into. Secondly, they are being asked to make decisions about the severity of a problem without context. They will often tell us later that they didn’t know where the line in the sand was. They were unsure of when to go from thinking ‘it will be OK’ through to ‘I may need help’ and then to ‘I need help immediately'.

So here are five of the most common warning signs followed by a traffic light system. Read through and if you are hitting some ambers then you may want to call us. If you have a red light at any point, then we definitely suggest you get in touch.

It’s important you are impartial when thinking about the list below. One of the things directors often regret when they have an insolvent business is being unrealistic earlier. Optimism is great in business but when it comes to finances it really doesn’t help.

5 insolvency warning traffic lights

 1 - Your bank account is running on empty, and you are using the overdraft

When there is little or no money in the bank it is a big sign that you have a major cashflow problem and, in the end, cash is king. Without the money to trade you cannot be in business.

Green light – You have had a sudden drain or difficult period (such as lockdowns) but there is money due imminently and there is more than enough to cover the upcoming bills.

Amber light – This is not the first time you have been in the overdraft, and you aren’t sure it won’t happen again in the foreseeable future. If the business isn’t growing and you can’t be sure of cash flow, it’s worth calling us for a chat to see if we can help stop this from getting worse.

Red light – You have been in the overdraft for months and can’t see it changing or worse you see a time when the overdraft will not be enough to get you through. If you are trading in your overdraft, call us.

2 - Demands for payment (creditor pressure) is becoming a problem and profits are low

We all occasionally need to juggle the bills, but being unable to pay is another thing entirely. 

Green light – You are putting off the occasional bill for a couple of days and it is rare you need to do so. For almost all months, you make a profit and pay on time.

Amber light – You are over your terms with some suppliers and even by juggling your cash flow you are barely meeting the invoices and there is little or no profit. Breaking even is OK occasionally but if you are not making money then you are storing up problems in the future. You need to address costs and income as soon as possible.

Red Light – Your creditors have issued court orders/final warnings or you are paying them by using loans and credit. You are also probably not able to pay yourself properly which is causing personal debt. This is a stop sign. Call us and let’s talk before this gets any worse.

3 - You have HMRC arrears

Owing money to the revenue service for tax or VAT is one of the earliest signs you may be in financial trouble.

Green light – HMRC were paid late for once, but it won’t happen again.

Amber – You are more than a few days overdue, and you are worried it may get longer. The advice here is not to fall into 'the quiet trap' (see red light) and start to repeatedly push HMRC down the payment list in favour of creditors from point 2 above.

Red light – HMRC are getting aggressive because you are very overdue on a payment, or you have now pushed paying them several times to pay people from point 2. Be careful with HMRC because they are a very ‘quiet’ creditor compared to others in that they don’t chase or follow up like a supplier would. The quiet trap here is that they go out of sight and out of mind until the big bill hits. Call us if you own money to HMRC. We can negotiate with them for you in some instances but, regadless of any other considerations, you need to know where you stand as a matter of urgency.

4 - You are worried about borrowing

Nobody likes debt but sometimes it is a prerequisite of being in business. It isn’t necessarily the borrowing that is the issue, it is more about recognising it is becoming a real problem and taking action.

Green light – You have borrowed in the past, but it is reducing and you can comfortably pay the business's outgoing costs every month.

Amber light – You are pushing payments occasionally and worried about paying your outstanding amounts including debts such as BBLs. This is actually not unusual, we all worry about debts but as long as your business is in profit and increasing revenue then you will probably get through. If you are not confident though, let’s have a chat about where you are with things.

Red light – The creditors are threatening, or have issued, default notices and you cannot pay the monthly demands. Call us, we need to talk. This is a classic cashflow problem and the creditors may be looking to wind your business up to get their money.

5 - You cannot pay the wages

There is no green or amber here. This is a simple yes or no answer to the question ‘will I be able to pay the staff at the end of the month’? 

Red light – If the answer to that question is ‘no, I can’t pay the employees’ then you need to contact us immediately.

This is not a complete list of warning signs, just some of the most common. If this hasn’t addressed your worries, there is much more information on our help for directors pages including how to recognise insolvency and advice and guidance on what to do if you are having problems.

As a final thought on the above. Things are rarely black and white, and this blog is only intended as a guideline.

If you think you need help then it is vital to act and arrange an appointment via our website or call us.

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