Cash-flow problems can be the first sign that a business is in financial distress. You may have work in progress, debtors who owe you money or assets on the balance sheet. But if those cannot be turned into cash quickly enough to meet liabilities, the company may be headed towards insolvency.
This situation often develops gradually rather than through a single event. And often your business can adapt, stretching payments and creating short-term fixes. However, over time this is rarely sustainable.
If this sounds like your situation, you might recognise these cash-flow problems that signal insolvency:
Regularly paying bills late
When late payment becomes routine rather than exceptional, it usually means the business doesn’t have enough cash to meet its normal commitments. Warning signs include:
- Suppliers being paid weeks or months late as standard
- Rent or utilities falling into arrears
- Only paying creditors after repeated chasing
- Needing to prioritise which bills get paid each month
HMRC arrears that keep growing
Tax arrears are one of the clearest indicators of cash-flow insolvency. HMRC debts tend to escalate once they fall behind. If arrears are increasing rather than reducing, that is a strong signal that the business is struggling to keep up.
Common patterns include:
- VAT being rolled from one quarter to the next
- PAYE or NIC paid late or in part
- Corporation Tax set aside mentally but not in cash
- Relying on future income to clear historic tax
Juggling payments to get through the month
Payment juggling keeps the business moving in the short term, but it usually means the company is already failing the cash-flow test. This often shows up as:
- Paying wages first and everything else later
- Using incoming customer payments to clear older debts immediately
- Moving money between accounts to keep balances positive
- Making decisions based on urgency rather than strategy
Relying on future income to pay today’s bills
If the business depends on these events then current liabilities are not being met from existing resources. This reliance on future income is a common feature of cash-flow insolvency:
- One large invoice landing to clear arrears
- New contracts being signed to pay historic debt
- Seasonal upturns to solve existing shortfalls
Credit being used to cover day-to-day costs
Short-term borrowing can support growth. But when borrowing replaces operating cash flow, the underlying problem is usually deeper than a temporary dip. Signals include:
- Overdrafts permanently at their limit
- Credit cards used to pay suppliers or tax
- New loans taken to repay old ones
Suppliers tightening terms or stopping supply
Supplier confidence tends to drop once payments become unreliable. This pressure can accelerate insolvency quickly. Early indicators include:
- Requests for part payment before delivery
- Shortened payment terms
- Accounts being put on stop
- Demands for personal reassurance
Pressure from multiple creditors at once
When pressure becomes widespread, it often means confidence in the company’s ability to pay has already gone. This can involve:
- Frequent chasers from different suppliers
- Debt collection agencies becoming involved
- A statutory demand being threatened or issued
- HMRC correspondence escalating in tone
What these signals mean for directors
Once a company can no longer pay its debts in full and on time, the legal position starts to change. At that point, directors are expected to place the interests of creditors ahead of shareholders and to take extra care with any decisions that affect the company’s finances.
This doesn’t mean the business will need to close immediately. Some companies can still recover if the underlying business is viable and the position is addressed early. However, from this stage, decisions should be based on the company’s real financial position.
For example, continuing to take on new liabilities when there is no reasonable prospect of meeting them can increase risk for directors.
Key takeaways
- Cash-flow insolvency is about timing, not profit or turnover
- Persistent late payment is a common early warning sign
- Growing HMRC arrears often signal deeper cash problems
- Payment juggling usually means the company cannot meet obligations
- Relying on future income to pay existing debts is a red flag
- Early pressure from multiple creditors often confirms insolvency
Get advice on cash-flow insolvency
If these cash-flow problems feel familiar, a short conversation can usually confirm where you stand. Speaking to a qualified insolvency practitioner helps you understand whether the business can stabilise or whether a more formal solution needs to be considered.
Getting early advice gives you clarity on your position, your responsibilities and the options available, before pressure escalates or control is lost. Speak to our experts for confidential guidance on the best next steps for your business.
