By Lisa Lappin, Restructuring and Insolvency Director 

Northern Ireland businesses have operated in a challenging economic environment for some time now. The combination of stubborn inflation, high interest rates and their impact on secure lending, a tight recruitment market and rising employee costs have resulted in a volatile market with little room for manoeuvre.

Now that the Bankruptcy and Companies Court has reopened to creditor winding up petitions, businesses that do find themselves in financial distress have less protection from creditor action.

With pressure on profit margins coming from all sides, the situation will in the first instance result in increased costs being passed on to the consumer, an unfortunate but entirely necessary, and in today’s climate normal, course of action to keep the business on course.

For some businesses, however, this set of circumstances has the potential to push them to the end of viability. Regardless of the industry, the advice for any company in a difficult financial position remains the same; act early and seek professional advice before it’s too late.

That can of course be easier said than done, and many owners or directors may simply be unaware of the issues or the scale of the pressure their company is facing. With talk of business collapse normalised in today’s economic climate, it’s important to know the warning signs of financial distress and where to look for them, to prevent problems from becoming unmanageable.

Typically, reduced cashflow is the ultimate sign of financial distress and indicates that a company will become increasingly less equipped, over time, to pay its debts. Failure to meet tax obligations such as National Insurance, PAYE or VAT can be a key element in losing control of company finances, and we often see HMRC as the largest creditor in a formal insolvency process.

On the people side, the failure to pay pension deductions from employee wages to a pension provider is often one of the first symptoms of a company under pressure, while the cancellation of staff bonuses can also indicate that finances are on the decline.

Perhaps less obvious are changes such as a lack of investment in new technology, people, or marketing, or the failure to make essential repairs to buildings or machinery in a timely manner. All may be indicative of poor cashflow and general financial distress.

Though behaviours can be hard to quantify, actions such as increasing creditors, lengthening creditor payment days, being slow to submit returns to HMRC, late filing of statutory accounts, and falling behind with the competition are all further symptoms of a business losing control of its cashflow, however these behaviours may mean something entirely different when happening in isolation.

Depending on the company’s purpose, an increase in stock levels can also be an early indication that orders are reducing, and finances are inevitably deteriorating.

What’s perhaps more obvious, and likely to cause immediate alarm, is directors finding themselves unable to draw an income from a business, and of course the threat of legal action from key creditors or pressure from the bank.

It’s important to remember that these issues, whether alone or in combination, do not inevitably spell the end for a business. Instead, they are vital areas for owners, directors, and managers to monitor, particularly in the economic environment we are operating in.

A company’s accounts will give a good indication of business performance, and timely management of accounts should highlight any red flags that need further exploration. The earlier professional advice is sought, the more options for business recovery will be available to avoid the situation becoming beyond the company’s control.

To discuss any aspect, please contact Lisa Lappin E: T: 028 9032 3466

This article first appeared in the October 2023 edition of Business Eye.