This question originally appeared on Quora: What are telltale signs that you're working at a "sinking ship" company?
As a specialist Insolvency Practitioner, with over 11+ years experience in winding up businesses, I would say that the following warning signs are consistent with your employer 'going broke'.
Some of the warning signs may not be obvious to employees who are not in the accounting or finance departments.
For ease of reference, I have segregated the warning signs into General and Financial warning signs:
General warning signs:
- Your superannuation (or 401K), although deducted from your payslip, is not actually being remitted to your superannuation fund.
- Rapid and/or unforeseen staff redundancies.
- Irregular movements of company assets. In particular, movements of assets that may appear to be for the benefit of the director(s), rather than the company as a whole. This sign is also consistent with a director getting ready to open another similar business, using your company's assets.
- Suppliers placing the company on 'stop credit' or who will only do business on a 'cash-on-delivery' basis.
- The company is receiving demand letters from multiple legal firms, chasing payment of bills.
- The CEO and CFO are stressed out and in closed door meetings more often than they normally do.
- The CFO and other key employees (particularly in the accounting and finance departments) resign all of a sudden.
- The company cannot afford pay rises, even if only increasing wages by the Consumer Price Index (circa 3% and varies from country to country).
Financial warning signs:
- The company no longer has a good relationship with their present bank. In other words, your employer is looking for a new credit provider.
- 'Special' arrangements are made with suppliers. Some arrangements may involve an exchange of assets rather than cash to pay bills and continue supply.
- Your suppliers' accounts are being paid outside of credit terms. Supplier accounts outside 90 days are generally not within commercial terms.
- Your employer pays their suppliers in round figures which do not reconcile to specific invoices.
- Your employer is bouncing checks (i.e. writing checks for which there are no funds and so the bank rejects them).
- Your employer is giving a check that is dated at a future date to be drawn on. This means that your employer does not have the cash 'today' for the check to be valid.
- Continual trading losses. Trading losses have to be funded somehow. Usually, by some form of short term debt.
- Overdue federal and state taxes.
- Liquidity ratio (current assets divided by current liabilities) of less than 1, indicating you have more short term debt than the necessary cash and receivables to pay such debt.
- Your employer cannot raise any more equity capital.
- Your employer has no access to alternate debt funding.
- Inability to produce timely and accurate financial reports.
The above list has been compiled from my own observations and from incorporating one of the most prominent insolvency cases where the judgement listed out the 'indicators of insolvency' ()[see paragraph 386 below].
The other element to consider here is that you cannot take any one (1) sign in isolation to form the opinion that your employer is 'going broke'. You need to consider a 'cluster' of information.
When Insolvency Practitioners conduct investigations, especially to pin-point the exact day that a company became insolvent, we try to prove as many of the elements outlined above. We look for financial and non-financial signs which paint a picture as to the status of the company as a whole.
What also must be considered is the difference between 'insolvency' (which is an inability to pay bills on time) versus 'temporary liquidity issues' (for instance, expanding a business to a new geographical location, for a future economical benefit, may absorb substantial cash commitments in the short term, meaning a temporary shortage of cash/receivables to pay current bills).
Proving insolvency is a cash flow test, rather than a balance sheet test.
In effect, you need to consider the 'commercial realities' of a situation and look at a cluster of information to consider whether your employer is 'going broke'.
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