Insolvency red flags that Accountants see first and why early action matters

Accountants can be first to recognise when something is going wrong in a business (and that can include those businesses that are not outwardly showing signs of distress).

Declining margins, persistent arrears, extended creditor terms, or a reliance on HMRC as an unofficial lender are not unusual to those preparing management accounts or year-end figures. Yet, despite these warning signs, directors may retain the view that “things will turn around next quarter” or “we can trade out of this”…

The gap between what the numbers say and what business’ management choose to do in response is where risk often lies.

The common red flags

In my experience working with SMEs across a range of sectors, the warning signs that accountants may recognise or acknowledge before management typically include:

1) Stresses on cash flow before it becomes obvious operationally

• Persistent negative operating cashflow, despite recorded profits
• Increasing reliance on short-term borrowing

2) Balance sheet deterioration

• Net current liabilities
• Growing aged creditors
• Increasing directors loan accounts

3) Creditor behaviour changes

• Reducing credit limits
• HMRC refusing Time to Pay renewals
• Closer monitoring by bank/funders

4) Increasing management overrides or adjustments (ie where numbers are being managed rather than reported)

• Aggressive revenue recognition
• Capitalising costs previously expensed
• Overly optimistic assumptions

5) Going concern stress indicators

• Reliance on undocumented shareholder support
• Stalled refinancing
• Reworking of forecasts to avoid audit qualification

Individually, these issues may be manageable but, they can point to deeper solvency concerns.

Why timing is critical

The earlier financial distress is addressed, the more options remain available.

From an insolvency perspective, delay can significantly reduce the routes open to a company. Informal restructuring, refinancing, or even a solvent wind-down may still be possible if advice is sought early. Leave it too late, and choices narrow rapidly, sometimes leaving liquidation as the only viable outcome.

This timing also matters for directors personally. Once a company becomes insolvent, directors’ duties shift towards creditors. Decisions made after that point are more likely to be scrutinised, increasing the risk of personal exposure.

Insolvency as a strategic tool, not a last resort

Speaking to an insolvency practitioner does not mean failure is inevitable. Early engagement often achieves the opposite. Used correctly, insolvency and restructuring processes can:

• Protect directors from escalating personal risk
• Preserve value for creditors
• Enable parts of a viable business to survive
• Provide clarity when decision-making has become clouded

Working together

The most successful outcomes we see are those where accountants and insolvency practitioners work collaboratively.

If nothing else, an early conversation can help confirm whether concerns are justified or provide reassurance that the business remains on safe ground.

We welcome initial contact, without charge and on a strictly confidential basis, to explore how we can assist you and your clients. If you would like to have a discussion with one of our experts, please do not hesitate to get in touch.