10 business distress signs to watch out for

Excessive borrowing is a clear warning sign. High gearing shows reliance on financial creditor funding rather than shareholder capital. It may be cheaper to borrow, but it is much riskier. The risk deepens when high gearing sits beside low interest cover, which reduces a firm’s ability to meet interest charges. Even small trading setbacks or shocks can then make repayments difficult.

As interest costs absorb more earnings, management loses capacity to invest or strengthen operations. Cash that should support growth flows to lenders. Refinancing becomes harder and more expensive. In periods of rising rates, too much debt often turns financial stress into genuine distress.
 

Growth is essential, yet rapid expansion can hide weakness. Acquisition sprees funded by debt are especially risky because they stretch management, increase integration challenges and obscure the performance of the core business.

Integration is complex. Cultures, systems and processes may not align, and many deals fail to deliver promised synergies. When these issues combine with high borrowing, the enlarged group can struggle to generate the cash it needs. Expansion and growing sales may look impressive in buoyant markets but can unravel quickly when conditions tighten, especially where integration and synergies goals are not achieved.

Opaque or overly complex business models demand caution. Firms that cannot explain how they generate cash rarely sustain long term profitability.

Complex structures often mask weak performance. Some companies diversify far beyond their expertise. Others rely on future promises rather than present income. A simple rule applies, if you cannot explain how value is created to a 12-year-old, the fundamentals are likely fragile.

An auditor’s report provides vital external insight into financial health. A qualified opinion signals disagreement with management or doubts about the accuracy of the accounts. It often reflects weak controls, questionable judgments or missing information.

Going concern commentary is equally important. It shows the auditor has concerns about the company’s ability to operate for the next year. An emphasis of matter, even without a full qualification, highlights issues requiring attention. These signals are among the most reliable indicators of deeper structural problems and should always be investigated before or continuing to extend credit.

A profit warning signals that earnings will fall short of expectations. Markets react quickly and share prices often drop. One warning may reflect temporary pressures, but repeated warnings, especially in quick succession, usually point to more serious problems.

These warnings can arise from weaker demand, disruption in supply chains, rising costs or strategic missteps. They may also expose shortcomings in forecasting. Stakeholders should assess whether the explanation is credible and whether similar issues appeared before.

Healthy companies convert profit into cash. When profits rise yet operating cash flow stays weak, something is wrong and further investigation is recommended. This gap may reflect short term tactics such as extended payment terms to customers to win market share, delayed expenses or cost reclassification.

Accounting choices can also distort the picture. Decisions on depreciation, inventory and asset valuations or interest capitalisation all influence reported results. A company that reports strong profits but generates little cash may be relying on aggressive accounting and could well face liquidity pressure when it comes to meeting interest, capital expenditure or creditor commitments.
 

Payment behaviour offers clear real time insight into financial strain. Delayed payments, irregular part payments or reduced communication usually reflect tightening cash flow that management has not disclosed.

Late payments may also indicate internal process failures or weakening customer relationships. For suppliers, these behaviours often appear long before insolvency. Monitoring payment patterns is therefore a practical early warning tool and a way to limit potential losses.

Strong governance depends on stable leadership. Sudden departures of executives or directors, especially in clusters, often show strategic tension or internal pressure. Disputes over reporting, risk appetite or business direction can all prompt exits.

Leadership change creates uncertainty and distracts management from operational priorities. It weakens stakeholder confidence and can affect customer relationships or trade terms. Boardroom instability is therefore more than an internal issue, it is a critical warning for external partners.

Difficulty securing refinancing or facing tighter credit terms signals rising financial pressure and reduced lender confidence. It limits management’s ability to manage cash flow, invest or stabilise the business, or do so at extra cost through higher, riskier lending from 2nd or 3rd tier lenders. Pay close attention to facility maturity dates to assess re-financing risks facing a business. 

Inventory build-up or supply chain disruption also reveals operational strain, often linked to falling demand, weak planning or tight working capital. Together these signs highlight growing financial and operational risks that require close attention.
 

Consistent delays in filing accounts are a practical sign of disorder. Late submissions may reflect weak controls, unresolved audit issues or difficulty producing reliable information. One delay may be harmless, but repeated occurrences suggest an organisation struggling with basic governance.

These delays also weaken stakeholder confidence and often sit alongside other signs of strain such as tight liquidity or unusual accounting choices. Creditors should take them seriously, especially when combined with other risk signals.