The warning signs of financial difficulty in a company's accounts
The warning signs of financial difficulty in a company's accounts

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

  • The warning signs of financial difficulty in a company's accounts
  • Causes of financial difficulty
  • Key aspects in financial accounts

This practice note is a guide to the commercial practitioner about what to look for in a company’s accounts when assessing its financial position, and the warning signs that may indicate financial difficulty or potential insolvency. See also How to identify a company in financial difficulty.

Causes of financial difficulty

Examination of the reasons leading to the insolvency of most companies often illustrates that avoidance could have occurred if the directors were aware of the warning signs.

Causes of companies’ failures often include one or more of the following factors:

  1. knock on effect of bad debts

  2. bad management

  3. lack of working capital/cashflow

  4. loss of marketplace, and

  5. poor understanding of the company’s finance function

Key aspects in financial accounts

Accounts are, when broken down, a simple list of assets and liabilities with the resulting balancing figure at the bottom of the page being a minus or hopefully a plus. In failing businesses you often find that directors are unable to understand and react to the financial information being provided by the in-house accountant and don’t readily understand their own accounting package.

Lack of visibility

The big issues with accounts is that with failing businesses these are often filed way after their due date at Companies House. The company may get fined but it