Is your business's engine warning light flashing?

And what can you do about it?

Running a small business is tough. While you’re juggling everything you’re often called to fight fires constantly too.

But what if those fires are actually just symptoms of bigger problems simmering beneath the surface? Just like a car’s dashboard flashing a warning light or a persistent cough signaling a potential health issue, your business can send out signals that something’s not right, even if things seem okay on the surface.

Ignoring these early warning signs could lead to serious trouble down the road but don’t panic yet.

This blog will help you identify those crucial red flags so you can act before things get out of your control.

What is Insolvency? (and why should you care?)

You’ve heard the term but to break it down simply: a business is considered insolvent when it can’t pay its bills on time and its debts are greater than the value of its assets. Business finances can be similar to personal accounts – if you owed more than you owned and couldn’t keep up with your payments, then you’d be in a tough spot

A temporary cash crunch or an unexpected expense doesn’t automatically mean that a business is insolvent. Every company hits rough patches. But if these issues become chronic, they can quickly escalate out of your control.

Two simple tests to gauge your business’s financial health

There are two quick indicating tests you can do yourself as director or owner to get a sense of your firm’s financial standing:

The cash flow test: Can you pay your bills when they’re due, not just today but also in the near future? If you’re constantly scrambling to cover payroll, supplier invoices or other regular and predictable bills then that’s a red flag.
The balance sheet test: Do you own more than you owe? Add up the value of everything your business owns (assets) and subtract what you owe (liabilities). If the result is negative, you need to take a closer look at your finances as you could be technically insolvent.

Bad news from the bank

Your bank is another early warning system. They use sophisticated tools to monitor accounts, and they’re often the first to spot potential problems. There are some clear warning signs from your bank that individually can be explained but collectively should not be ignored:

Returned payments: This is a clear sign you’re running low on funds.
Refused loans or overdraft increases: If the bank won’t lend you any more money, they might see risks you haven’t.
Requests for extra security: If they start asking for more collateral on loans, it means they’re less confident in your ability to repay – for a reason.
Demanding personal guarantees: If you’re being asked to put your personal assets on the line, the bank wants someone to hold to account, this is more serious.

Warning signs from your suppliers or other creditors

You know how vital good relationships with suppliers are. If these relationships start to strain, it can be a sign of deeper financial trouble. You need to watch out for any of the following this year:

Consistently late payments: Paying bills late will damage your credit and your reputation.
Suppliers chasing you for payment: Frequent calls or emails about overdue invoices are a major warning.
Legal demands: Receiving or worse, ignoring formal requests for payment means the situation has likely become very serious.
Difficulty obtaining new credit: If you can’t get new credit facilities or extend existing credit lines, suppliers might see you as a risk.
Suddenly opening lots of new accounts: Are you juggling multiple new suppliers because your existing ones have cut you off? This is a problem in itself and is probably a symptom of a bigger one.

Legal trouble: the ultimate red flag

These are signs your business is in serious financial distress. If any of these apply to you, seek professional advice immediately – especially if any of them are a surprise.

Visits from Bailiffs or High Court Enforcement Officers (HCEOs): This is a critical situation as bailiffs are legally empowered to remove equipment and assets up to the value of debts owed.
Court Summonses or County Court Judgements (CCJs): You’ve either been taken to court over unpaid debts or a judge has agreed and issued a CCJ.
Statutory demands and/or winding-up petitions: A creditor is formally demanding payment and if they don’t receive it then a court could order your closure.

Is your business’s engine warning light flashing?