How do directors recognise a solvency problem?

Separate explanations are hiding a possible pattern

A distribution company’s director sees suppliers shortening terms, an overdraft staying near its limit and tax payments being pushed into next month. Each issue has been explained separately by the accounts team. The director needs to determine whether those explanations describe a temporary disruption or conceal a broader inability to meet obligations.

Collect signals from the whole business

Bring together aged payables, debtor collections, bank balances, tax accounts and recent notices. Ask operations whether suppliers are refusing orders or requiring cash first. Compare management reports with what staff actually encounter.

ASIC lists financial and operational warning signs, including overdue creditors and restricted funding. Use those signs to prompt investigation, not as an automatic checklist declaring every affected company insolvent.

Source: ASIC — Insolvency for directors

Check the reliability of the figures

Reconcile bank and creditor balances and identify missing invoices or unreconciled transfers. Confirm that tax and employee-related liabilities appear in the same reporting period as the trading figures.

A forecast built on incomplete records can look reassuring while omitting the very debts that matter. Record unknowns explicitly and allocate someone to resolve each one.

Challenge rescue assumptions

Ask what supports the next large receipt, finance approval or asset sale. Determine whether amounts, timing and conditions are documented. Include the costs required to obtain the anticipated receipt.

Test a plausible delay rather than only management’s preferred outcome. If the plan fails when one uncertain event slips, directors need to understand that dependence before committing further.

Turn concern into a documented decision

Arrange a qualified solvency review and provide the evidence, including uncomfortable information. Record advice, immediate actions and the next review point. Different circumstances may lead to different options.

Keep monitoring after the meeting. An initial assessment can become outdated when a customer fails, funding changes or a creditor withdraws time to pay.

Bring the warning signs into one solvency review

Collect payment, funding and operational warning signs together.

Reconcile the data and expose uncertain assumptions.

Obtain qualified advice and document the response.

Call CRP today to coordinate a timely assessment of the company’s financial warning signs.