When disaster strikes, companies can go from stable and profitable to insolvent in very little time. Losing an important customer, ineffective record keeping or a lack of credit control can all cause your business to become insolvent, often very quickly.

Insolvency can seem to come from nowhere – one day, a company is profitable and healthy, and the next it’s insolvent. But look hard enough and you can usually spot the business issues that led to the company’s financial distress.

A huge range of business issues can lead to insolvency (aside from a global pandemic), many of which aren’t taken seriously by company directors until it’s too late. Read on to discover seven highly common business issues that could, and often do, lead to insolvency.

Your business has strained cash flow

Is your company’s cash flow inconsistent and constantly strained? Cash flow is the key to a healthy company. Businesses with a constant flow of cash rarely run into a situation in which they can’t pay their creditors on time.

Businesses that have inconsistent cash flow and days, weeks or month without any payments from their customers, on the other hand, frequently run into situations in which there simply isn’t enough cash to pay their creditors on time.

If your business’s cash flow is strained and inconsistent, it could eventually result in insolvency. Even if your cash flow doesn’t seem like an issue now, it could become a major problem in the future.

Great businesses have strong, steady cash flow. If your company’s cash flow is slow, always tight or simply not enough to pay your creditors, it’s important that you take a look at the source of its cash flow problems and implement a solution.

Your business can’t access credit

How much credit can your company access? Many businesses, from small retailers and manufacturers to large corporations, depend on credit to purchase the supplies and labour required to keep their operation running.

Run out of credit and your business could very easily run into problems. When your business relies on credit in order to grow and operate, it’s important to make sure it has a strong financial position that keeps access to credit available.

Creditors like to see steady, consistent cash flow and a history of profits. Before you focus on growing your small business into a highly profitable empire, make sure its finances are such that creditors are unlikely to cut you off at a bad moment.

Your business depends on credit too much

Is your business overly dependent on credit? While many businesses need credit in order to grow, healthy businesses typically use a combination of cash and credit to pay creditors and keep everything moving forward. One of the significant impacts of the coronavirus pandemic has been businesses taking on more debt in the form of CBILS and Bounce Back Loans.

How much does your company spend on repaying credit compared to its profits? Financially strong companies often use credit to buy equipment, supplies and other items, but rarely use credit to make up for poor profits and limited cash flow.

When your company depends on its credit too much, lenders start to take notice and place it under extra scrutiny. This could lead to a limit being placed on its credit – an issue for a company that has limited, inconsistent and unpredictable cash flow.

Your business can’t afford to pay its taxes

Can your company afford to pay VAT, PAYE and other important taxes? Paying tax is an important part of running a business, and failing to pay your tax on time can lead to a series of extremely serious problems for your business.

Fall into arrears for VAT or PAYE, for example, and your company could receive a distraint letter from HMRC giving it as little as seven days to pay its arrears or face legal action.

Financially healthy companies always keep enough cash available to pay taxes and continue operating without issue. If your company can’t afford to pay its taxes, it’s likely walking down the path towards insolvency.

Your business doesn’t keep accurate records

Do you know how much your company earned in the last quarter? What about its costs for the last month? Are you aware of the amount of products your company delivers on a daily, weekly or monthly basis?

When you fail to keep accurate records about your company’s finances, it’s easy to become out of touch with the reality of your business. Lose track of reality and you could find your business facing “sudden” insolvency due to issues you didn’t notice.

One of the most important aspects of running a business is keeping detailed, useful and accurate records. From gross profit to monthly sales and costs, make sure you keep detailed records that help you understand your business at any moment.

Your business depends too much on a few customers

Does 80% of your business’s revenue come from 20% of its customers? Could losing one customer destroy your business? When your business is overly dependent on a customer or client, it faces a serious risk of insolvency if that customer is lost.

Closing a big deal with a lucrative customer is a great feeling, but it could put your business at risk if it starts to dominate its focus. Businesses with a diverse range of customers are less likely to become insolvent than ultra-focused businesses.

If your business is too dependent on one or two large customers for the bulk of its earnings, it’s important that you take efforts to diversify. Businesses with a variety of income sources are far more protected against insolvency due to non-payment.

You take too much money out of your business

When your business is doing well, it’s natural to take slightly more money out for yourself and your family. However, taking too much money out of your business is an easy way to drive it towards insolvency.

From an unforeseen tax bill to a major customer defaulting on their account, there are a huge range of potentially hazardous situations that are far easier to manage if your business has plenty of cash available.

Feel free to enjoy your business’s success, but do so within reason. Taking too much cash out of your business is one of the most common causes of insolvency for small and medium-sized businesses.

TruSolv can help

If any of these scenarios sound too familiar, now is the right time to speak to TruSolv. We can help you to address these common problems and minimise their impact on your business. Call us today on 0808 196 8676.