Financial difficulty and the early warning signs

Gareth Pugh, Associate Director at Baker Tilly

 

Gareth Pugh

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.

 

Financial control

  • 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

Relationships

  • Deteriorating relationships between senior management and stakeholders
  • Difficulty contacting management or the finance team
  • High staff turnover
  • Management distracted from day to day tasks by fire-fighting
  • The loss of one large customer or a number of smaller customers simultaneously

Summary

 

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 suppliers.

 

 

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