How to identify a company in financial difficulty
How to identify a company in financial difficulty

The following Commercial guidance note provides comprehensive and up to date legal information covering:

  • How to identify a company in financial difficulty
  • Considerations
  • Avoiding corporate failure
  • Corporate failure options

This Practice Note explains the decline curve of a business and gives guidance to commercial practitioners on how to get the information necessary to assess how serious a business’ difficulties are. See also The warning signs of financial difficulty in a company's accounts.

Considerations

General

A good starting point when considering if a company is in financial difficulty, or will be in the short to medium term, is to consider the following:

  1. Does the company have a current business plan?

  2. Do they review costs and overheads as well as sales?

  3. Was the last set of accounts filed more than 12 months ago?

  4. Are regular management accounts prepared?

  5. Do they prepare and review cash flow forecasts?

  6. Do directors meet regularly to review progress?

Signs to lenders

The concerns of the company's lenders be it the bank, factoring agents, venture capitalists or general creditors often centres on receiving and understanding information provided by the company in a timely manner. For instance a bank will identify that a company is in financial trouble by a number of factors including:

  1. overdraft limit being increased without prior consent

  2. request to meet wages and pressing creditors, and

  3. lower account activity by the company with the bank (which may lead to the impression that the company are paying cash for services and creditors which would indicate the company