Companies in financial distress—how commercial practitioners can spot the warning signs
Produced in partnership with Frank Ofonagoro of Quantuma
Companies in financial distress—how commercial practitioners can spot the warning signs

The following Commercial practice note produced in partnership with Frank Ofonagoro of Quantuma provides comprehensive and up to date legal information covering:

  • Companies in financial distress—how commercial practitioners can spot the warning signs
  • Establishing serious financial difficulty
  • Warning signs
  • Financial information analysis
  • Profit and loss account
  • Balance sheet
  • Assets
  • Liabilities
  • Short-term cashflow forecast
  • Critical issues to focus on in order to stabilise a company facing financial difficulties
  • More...

This Practice Note is a guide for the commercial practitioner on how to ascertain when a company is facing serious financially difficulty. It also provides a summary of the critical issues to focus on in order to stabilise the business whilst considering the options available to the company, and sets out considerations for a business trading with a company in financial difficulty.

Establishing serious financial difficulty

Typically, there will be clues to be found in a company’s financial statements and management accounts, but also in correspondence with key suppliers and debt providers (eg banks, supplier statutory demands etc).

If left unaddressed by the board of directors these warning signs will, in most circumstances, ultimately lead to a value destroying formal insolvency of the subject company.

Warning signs

Any examination of the average causes of insolvency for most companies will typically encompass one or more of the following warning signs which were either ignored, not spotted in time, or left too late before being tackled:

  1. increased competition leading to loss of key customers and reduced margins

  2. obsolete business model due to technological development or change in customer demand/revenue channels

  3. poor cash generation/working capital management

  4. excessive debt and associated debt service costs

  5. breaching banking covenants

  6. legal enforcement threats from creditors (letters before action, statutory demands, HMRC notices etc), and

  7. poor quality management

Financial information analysis

When seeking to establish the viability of

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