10 Warning Signs Your Business is Headed for Bankruptcy

Businesses going into bankruptcy is not uncommon. A staggering 124,065 businesses filed for insolvency in a 12-month period ending October 2023 according to a CEIC data report.

Insolvency is the biggest challenge because businesses eventually fall into liquidation. Businesses may file for voluntary or compulsory insolvency, depending on several factors.

Bankruptcy is a legal course of action that a business goes through. But no business falls into insolvency in a day or short period.

If you are proactive and smart, you can observe warning signs saying, “Your business is headed for bankruptcy”.

1. Your Cash Problem is Bigger Than the Liquidity Problem

Liquidity is a short-term challenge when you can’t arrange enough cash for working capital needs.

You can apply for a new credit line, get a personal loan, or extend the credit terms with suppliers to solve the liquidity crunch in the short term.

When your cash challenge persists for longer, It’s not just liquidity. You must introspect for strategic loopholes, operational efficiency, and solvency.

2. Operating Margins are Consistently Negative

Insolvency and bankruptcy are balance sheet problems alright but the bottom line of your business is profit, always.

When you don’t sustain sufficient profit margins your cash problem worsens. All the generated cash erodes in recovering operational losses.

If you keep seeing those negative numbers in the income statement, your cash flow and liabilities will keep suffering.

3. Your Inventory is Not Optimized

When a business suffers from operational efficiency stress, it usually comes to managing inventory.

If your inventory line is out of order, you are never going to manage the working capital and cash flows of your business in the short term.

It happens when either the inventory turnover is too slow or stocks for the products in demand are often unavailable.

4. You Have Been Put on the Stop Supply/Credit List

A major warning sign of the liquidity problem comes when your suppliers put you on the “stop supply” list and move to the cash-only terms.

You’ll find yourself on the “credit monitoring” list of your creditors as your credit terms exacerbate the liquidity issue.

Both these warning signs not only indicate a liquidity problem but point to the long-term insolvency challenge.

5. You have Exhausted the Credit Limits

It’s normal for a business to explore different financing options. Once a business is in financial distress, it will look for personal and corporate financing solutions.

But the real problem starts when you have exhausted all financing options. For instance, if your overdraft limit is permanently at 100% most of the time.

6. Delayed or Falling Debt Payments

Even when you have access to different financing options like a credit card, a commercial loan, an overdraft facility, or a personal loan, you must pay installments on time.

It’s an indicator that your business fundamentals are not on the right track. Either you are not generating sufficient cash or it is eroding to recover other liabilities.

7. You are Desperate for Debt Restructuring

It’s a tactical move when you go for debt refinancing but you are desperate for debt restructuring altogether, the problem is enormous.

Businesses usually go for debt restructuring when they’re out of financing options and in danger of insolvency. However, creditors at this stage may be reluctant to opt for this option if they don’t get debt collateral.

8. Selling Business Assets

This is where a business has expired the options of utilizing savings and financing facilities.

If you are compelled to sell a wbusiness asset, a profitable business division, and/or a significant intangible asset (like a major contract), your insolvency problem is already deep-rooted.

9. A High Employee Turnover

Perhaps your employees saw it coming but you couldn’t, moreover, you couldn’t agree on it and they left.

In any case, if your employee turnover is rising and you cannot retain the top talent, it’s a sign your business is in trouble. Although there are several other factors resulting in a high turnover, a sustained insolvency risk is one of the major ones.

10. You are Involved in Legal Actions

Your trade suppliers can lose patience and may opt for the legal route. Your creditors could send you a late penalty notice, which if unanswered, could land you in the court.

In other situations, you may be a plaintiff against one of your most reliable and major customers. A legal action for financial issues is never a good sign for your business either way.

Insolvency signs do not mean you’ll go bankrupt but if you ignore them, you certainly will.

Like any other strategic challenge, overcoming insolvency and bankruptcy needs expertise and advice to take you out of trouble.