Signs When A Company Is In Trouble

When a customer or business partner stops paying their bills, it could be more than just a delay—it may be a sign of deeper financial trouble. Identifying the early warning signs of a company in distress can protect your own cash flow, reduce your exposure to bad debts, and help you make informed decisions about continuing the relationship.

Key Signs a Company Is in Financial Trouble

1. Mounting Pressure from Creditors

If other suppliers are chasing for payment, you may not be far behind. One key metric is creditor days—if it's increasing over time, the company may be stretching out payment terms to manage cash shortages.

2. Supply Disruptions

If suppliers are threatening to or have already stopped supplying goods or services, it indicates a breakdown in trust and cash flow.

3. Ongoing Trading Losses

Consistent losses without any visible source of additional funding—whether through director contributions or bank finance—suggest insolvency may not be far off.

4. Accounting Irregularities

Be wary of disorganised or error-prone bookkeeping. This may show up as unexplained adjustments, unapplied payments, or inaccurate debtor statements. These issues often mask larger problems.

5. Unpaid or Overdue BAS Lodgements

Late or missing Business Activity Statement (BAS) lodgements—and especially unpaid GST—are strong indicators of financial strain and potential ATO enforcement action.

6. Missed Earnings Targets

Consistently underperforming companies often suffer from poor forecasting, ineffective strategy, or structural weaknesses in the business model.

7. Unpaid Superannuation

If employee super hasn't been paid, it’s a red flag. The ATO takes this seriously and it’s often one of the first expenses to be deferred when a business is struggling.

8. Customer Concentration Risk

Relying on a few key customers puts a business at risk. If even one of those customers defaults or delays payment, the company’s cash flow could be severely impacted.

Less Obvious, but Critical, Indicators of Financial Distress

9. Shifts Away from Core Business

Sudden changes in strategy or new, unrelated product offerings can suggest desperation or a failing core business.

10. Aggressive Price Cutting

Deep discounts may indicate the company is trying to raise cash quickly, often at the expense of profitability.

11. Excess or Obsolete Inventory

High levels of unsold stock—measured by inventory days—can signal weak demand or poor inventory management. In many businesses, excess stock hides losses.

12. Economic or Sector Downturns

External market conditions matter. If the business operates in a sector currently under pressure (e.g. retail, construction, imports), its viability may be affected.

13. Low Margins or Underpricing

Businesses that compete purely on price or fail to factor in all costs are especially vulnerable. Thin margins leave no room for error when bad debts or market changes hit.

Legal Responsibilities of Directors

It’s important to note that company directors have a legal duty to prevent their business from trading while insolvent. If they breach this duty, they can be held personally liable for debts by a liquidator. Don’t ignore the warning signs.

Need to Investigate a Troubled Customer or Supplier?

At Dolman Bateman, we specialise in forensic accounting and business investigations. If you're concerned about a debtor, trading partner, or investment, our team can conduct a financial health check or solvency review, fast.

📞 Contact us today for a confidential consultation.

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Disclaimer:

The information provided in this article is general in nature and does not constitute personal financial, legal or tax advice. While every effort has been made to ensure the accuracy of this content at the time of publication, tax laws and regulations may change, and individual circumstances vary. Dolman Bateman accepts no responsibility or liability for any loss or damage incurred as a result of acting on or relying upon any of the information contained herein. You should seek professional advice tailored to your specific situation before making any financial or tax decision.