In today’s unpredictable economic climate, it is important that business owners remain alert to early warning signs of potential insolvency in order to act to mitigate risks early. Not recognising or ignoring these early warning signs may lead to worst case scenarios. By then, any corrective efforts would be late. 

Why is it Important to Recognise the Early Warning Signs of Insolvency?

It is vital to be aware if your business is in trouble as directors who continue to trade while insolvent will risk fines or be made personally responsible for any company debts. In view of the COVID-19 situation, the government has put in place new measures to offer temporary relief to businesses and individuals affected by the pandemic. 

However, there is a fine line between being in debt and being insolvent. As a business owner, you must keep an eye on whether your company is in debt, or insolvent. As soon as your company becomes insolvent, you must act quickly to maximise your creditors’ interests. 

What are Insolvency Tests?

Even though no single test can be conclusive as a measure of solvency, there are two main tests of insolvency: 

1. An inability to meet a demand for a debt which has become due (the “cash flow” test)
2. An excess of liabilities over assets (the “balance sheet” test). 

For most purposes, it is the present inability to pay debts that is the crucial factor. 

Early Warning Signs of Insolvency

The following are 8 early warning signs that your business could be heading for insolvency. By keeping an eye on these warning signs, you will be able to act quickly and implement corrective action such as business restructuring, engaging a specialist business advisor or diversifying your business. 

1. Insufficient Cash Reserves

While you may be busy servicing existing and ongoing debts and obligations, it is also important that you have sufficient cash reserves in place to deal with any unexpected events, or be able to leverage opportunities that come your way. If you do not have sufficient cash in your reserves, it will put your business in an unfavourable position. 

2. Cash Flow Problems

Poor cash flow management is a problem especially among small and medium-sized enterprises (SMEs) in Singapore. If you do not manage your cash flow strategically, you could miss out on investing in technology to spur growth. If your business has been delaying payments or requesting for payment extensions, it is cause for concern.

3. No Access to Finance

If your business is unable to take a financial loan because the bank deems it too risky or because your business is at the limit of its borrowing capacity, this can be a significant warning sign. 

4. Unclear Business Model

Without a clear business model, you may be at risk of insolvency. This is because you will not have visibility over who your customers are, how your business makes money, and where future growth will come from. Early warning signs of insolvency may include the lack of business and succession planning, as well as ineffective performance management processes.

5. Unclear Reporting

If you have not had financial statements drawn up for you, or you did not have professional accounting help thus far, you may not have visibility over where your income and losses are coming from. This could put you at risk of insolvency. 

6. Staffing Issues

If your business is experiencing too high a staff turnover, or if it is unable to pay its staff on time, this could be another sign that your business is not being managed well. In fact, over-reliance on one or two key personnel is also a risky strategy as if those key people are no longer with the business, the business will struggle to operate. You are therefore advised to review the structure of your business to prevent over-reliance on one or two key personnel. 

7. Unaware of Market Fluctuations

Paying attention to market changes and fluctuations should be one of your top priorities as not doing so can lead to missed opportunities. If you observe that your sales are declining, or if your business is struggling to keep up with the competition, something needs to be done. If you are not on top of these measures and indicators, your business will be at risk. 

8. Not Addressing Issues Promptly

If you delay identifying and addressing business performance issues, it will be difficult for your business to maintain its competitiveness. Business owners will need to be flexible about addressing issues as they arise. If necessary, they should enlist professional help or the assistance of specialist advisors.

What Corrective Action can I take?

If you are seeing these signs of company insolvency, do not ignore the problems. Take action to resolve these problems early to avoid having to liquidate your company or wind up. Keep the lines of communications open with your creditors. Even if you are unable to pay now, establish a time frame for payment and let your creditors know your situation. 

One way to increase cash flow is to cut costs, which may mean disposing of some of your assets, or retrenching staff. Make a list of your expenses and go through it with a professional accountant who can advise you accordingly. When engaging professional accounting services, look for providers that are recognised by professional bodies and that have relevant experience in this area. 

Engage a Professional Corporate Services Provider 

At Corporate Services Singapore, we understand that financial trouble can happen for businesses regardless of the global economic situation. From negotiating delinquent debts and working out a compromise with creditors, to formal insolvency arrangements and corporate reshuffling, Corporate Services Singapore has years of experience and expertise in assessing such business situations and recommending the best course of action for businesses. 

Seeking new solutions to save your business? Access expert financial advice and outsourced accounting services today by giving Corporate Services Singapore a call at 6602 8286 or email info@corporateservicessingapore.com today.