Prevent insolvency by knowing the warning signs

When you look back at a previous time that a corporate insolvency event was narrowly avoided, it’s often possible to spot the red flags and warning signs that, if heeded earlier, may have resulted in a different outcome.

Key metrics such as sales revenue, net profit, and driver retention rates, show the likely elements that caused the slide into insolvency, but a toxic company culture can sometimes be overlooked as a significant contributor.

How can toxic company culture lead to insolvency?

Individual companies have their own shared values, behaviours, and beliefs, and it’s these that form their all-encompassing ‘company culture’. One element of a healthy corporate culture that supports business success is promoting staff wellbeing. This includes the treatment of staff, fair pay, driver conditions, benefits and rights.

This type of support can be palpable to employees in their everyday work - when their efforts are recognised and praised, for example, their employer provides access to advanced driving training programmes, upgraded fleets, private health services, physical and mental health support programmes and greater earning potential.

A bad corporate culture, on the other hand, typically has the opposite effect on employees who become disengaged and unreliable. This results in high staff absence rates, missed deliveries and ultimately, a decline in business performance.

Other warning signs and red flags of financial decline

Increase in payment days

When clients pay their invoices late, poor cash flow can quickly lead to problems for the business in paying its own bills, with the ensuing increased risk of insolvency. Consistently having to chase payments is a red flag for the business in terms of its financial health.

Relentless creditor pressure

Severe creditor pressure is a key warning sign that the company may already be insolvent. Being unable to pay bills or repay borrowing as contractually required leaves the business open to being forcibly liquidated if a creditor presents a winding-up petition in court. This may include asset finance repayments which gives you partial ownership over your fleets or industrial machinery.

Tax arrears

HMRC is commonly a large creditor in corporate insolvencies and can force a company to close if it believes the business is insolvent. The tax body acts quickly to minimise its losses, and this commonly happens following non-payment of a County Court Judgment (CCJ) or statutory demand.

High staff turnover and low retention

Excessive staff turnover causes serious disruption at the ground level of a fleet operators’ business. The high cost of recruitment, training and missed deliveries can strain working capital, but excessive pressure is also placed on existing drivers who are expected to cover an increased work schedule.

Borrowing applications refused

When a company cannot secure the lending it needs, the lender requires a personal guarantee before sanctioning a loan, or trade suppliers withdraw their credit facility, it’s a strong sign that the business is in financial distress and heading towards insolvency.

How can road freight transport operators avoid insolvency?

A clear business strategy and access to meaningful data can guide companies away from insolvency. Reliable management information provides the initial awareness and insight to deal with issues as they arise and save the business from financial decline. This includes a clear image of the company balance sheet, debt-to-asset ratio and profit forecasts, partnered with professional guidance from an accountant or insolvency practitioner.

An increase in debtor days, for example, leaves a company short of cash to pay its fleet maintenance costs and, therefore, more exposed to insolvency. This problem can be quickly rectified by strengthening debt collection procedures and chasing payments consistently.

Cultural issues can also plague a company to the point of operational dysfunction if staff absences or contract terminations cause a drop in productivity. Developing a healthy corporate culture does provide a foundation for growth, however, and can alleviate the risks of insolvency for company directors.

Jonathan Munnery is a company liquidation expert at UK Liquidators, the UK’s largest provider of company liquidation services, part of Begbies Traynor Group