10 Early Warning Signs of Insolvency for Small Business

Insolvency can be a significant fear or worry for many entrepreneurs with small businesses. Even when the local economic climate is holding stable many businesses still run the risk of becoming insolvent.

One of the biggest reasons for small companies facing insolvency comes down to ignoring, or failing to identify the warning signs of the situation before it develops. This can often be because corrective actions were postponed and businesses find it too difficult to make a turnaround before serious damage sets in or they receive a wind up notice from ATO. 

This is why it is important for entrepreneurs to monitor their businesses closely and to watch out for these 10 early warning signs of insolvency:

1. Scant Cash Reserves

It is always natural to first monitor and tend to your ongoing debts and current obligations. A common mistake that many businesses make, is, failing to create a reserve that can help deal with unexpected situations or so your company can be ready for lucrative investment or business expansion opportunities as they arise. 

2. Pitiable Cash Flow Management

Businesses that fail to manage cash flow effectively are on a collision course. If cash flow isn’t managed strategically then unforeseen events such as losing a major client will suddenly increase interest rates or could leave you in a difficult situation

3. Unable To Access Finance

Being unable to access finances when disaster strikes or when lucrative opportunities arise can prevent your business from growing and can be harmful to your company in challenging situations. If banks deem your loans too risky or if you reached your borrowing capacity then you very well could be in financial ‘danger’. 

4. Cloudy Reporting

Financial reports can be challenging to understand if you run a complex business. If your reporting systems are not transparent, then you won’t see where income is coming from or where losses occur. This can have adverse effects on your ability to target problematic areas within the company or to steer your business in the best direction.

5. Delayed Payments

Cash flow problems are common in businesses but if payments on obligations become delayed then you could be in trouble. Seeking alternative emergency funding or requesting extensions can help you out of your current situation but a major concern can quickly arise when you are unable to pay invoices entirely.

6. Staffing Problems

Staffing issues such as a high staff turnover rate or payment problems due to restricted cash flow can pose a huge problem for your business. High staff turnover rates can result in poor service delivery where payment delays can anger your employees and encourage them to go on a slow or full-on strike.

7. An Unclear Business Model

A good, strategic business model is important for numerous reasons. It can help identify your exact target market, identify income flows within the company, identify future growth opportunities and to help you keep track of all business functions. An unclear business model can be disastrous to your company in the short and long run.

8. Over-Reliance on Key Customers or Suppliers

Relying on a handful of customers or suppliers can be dangerous for your company. If you lose a few key customers, which results in the loss of sales and if your suppliers run out of resources this can easily have a flow-on effect to running out of products on the shelf.

9. Failing To Monitor Market Fluctuations

If you don’t pay active attention to your environment, market and the economy then you can fail to identify valuable opportunities or you could fall behind the competition. A decline in sales is usually one of the first signs that you need to make some changes within your company.

10. Failing To Address Issues

Business issues don’t just solve themselves. You need to work hard on staying competitive, to keep your business modern and to solve any problems within your company as they arise.

Do you notice any of the above issues within your company? Get in touch with your reliable pre-insolvency consultant in Melbourne to get professional strategic advice around your company. Insolvency is a serious situation, if you believe you may be headed in this direction, early action will always help mitigate the level of risk and minimise potential consequences/losses. 

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