Financial difficulty and the early warning signs
Gareth Pugh, Associate Director at Baker Tilly
Whilst there are exceptions, the process leading to business
failure typically occurs over a protracted period of time.
The key to preserving business value in such situations is to
identify and address the underlying problems as early as possible
thus avoiding a funding crisis.
If the management team is able to recognise warning signs and
prepare for the difficulties that lie ahead by taking immediate
steps to protect their business, they will be able to limit the
damage suffered and, in many cases, avoid insolvency
altogether. This is equally important when considering the
stability of suppliers, customers and trading partners, where
the failure of any of these may have significant knock-on
effect on the businesses that transacts with them.
Signs of distress
The extent to which warning signs are identifiable depends
largely on the quality and timeliness of the financial
information. Funders and investors will have access to
different information to the management team and suppliers.
Summarised below are some key signs to look out for.
- Absent or inaccurate forecasts or budgets
- Management information regularly late
- Poor management of working capital
- Crown debt arrears
- Routine use of maximum lending facilities
- Late payment of suppliers
- Deteriorating relationships between senior management and
- Difficulty contacting management or the finance team
- High staff turnover
- Management distracted from day to day tasks by
- The loss of one large customer or a number of smaller customers
Stakeholders should keep a close eye out for warning signs and
take swift steps to address the situation. The early
involvement of a professional adviser can ensure that any problems
are addressed early, thus improving the chance of survival.
Baker Tilly's Restructuring team work closely with Welsh SME's,
their stakeholders and their advisers and has the expertise to
provide advice and support to ensure that creditor and shareholder
value is preserved.
Its risk management product, Tracker (www.tracker-online.com) can
also help businesses avoid bad debts by monitoring customers and