Last updated: 07 Jul 2025 09:00 Posted in: AIA
Marco Piacquadio considers how to identify the early warning signs of financial distress, and how you can help your clients to respond constructively.
In today’s economic climate, many small business owners are under pressure. Rising costs, changing tax rules and ongoing geopolitical uncertainty mean that companies once considered stable might begin to struggle.
One of the more pressing concerns is that directors often don’t realise there is a problem until it’s too late. That is where your role as their accountant becomes vital. You are not just submitting returns and preparing accounts – you are often the first person who sees the warning signs that action is needed.
Why you need to start the conversation
Conversations around financial distress aren’t always easy. Many directors will try to resolve issues quietly, without seeking help. That hesitation is understandable – but it can also be dangerous.
As their accountant, you are in a unique position of trust. You often have a clearer view of their financial position than anyone else. You can see the trends, the pressure points and the changes that warrant further attention. But insight only becomes impactful if it is shared. Building regular, open dialogue into your working relationship – which should take place monthly or quarterly, not just at year-end – helps to normalise these discussions.
It gives you the opportunity to raise concerns with your client while they are still manageable, and gives your client the space to respond constructively.
When credit control begins to weaken
Many directors don’t immediately see a slowdown in payments as a serious threat. They may be focused on keeping work coming in, and as long as invoices are being issued, the assumption is that things are under control.
However, a shift in aged debt, growing reliance on a small number of customers or extended terms under pressure are all indicators that something is starting to slip. These are patterns worth flagging early.
Clients might recognise that they are constantly chasing money but not necessarily understand how that’s feeding wider financial pressure. These are the moments where regular strategic check-ins can make the difference – turning operational updates into forward-looking conversations.
Whether it requires a change in their credit control process, a move toward invoice finance or a re-evaluation of customer terms, the goal is to help your client to regain control – before reactive decisions become the norm.
Are margins quietly disappearing?
A weakening margin doesn’t always trigger alarm bells straight away. It can be one of the most telling early signs of financial strain, however. The causes are not always dramatic – more often, problems are due to the cumulative effect of rising costs, higher wages, increased overheads and shifts in supply chain pricing.
In some cases, directors are aware that costs have gone up but hesitate to pass these on through pricing. Concern about losing customers or damaging longstanding relationships often leads to delays in reviewing pricing strategy, even when margins are no longer sustainable.
This is where your support is critical. You can provide clarity by contextualising the numbers, modelling the impact of incremental increases and helping directors to weigh commercial risks against financial necessity. Even modest adjustments to pricing, or revisiting high-cost areas of the business, can protect profitability before losses become embedded.
By framing these conversations around long-term viability rather than short-term discomfort, you help to clients move from hesitation to informed action.
Persistent cash-flow pressure
Sporadic cash-flow concerns are common in small businesses. When short-term fixes become routine, however, the warning lights start flashing.
Signs to look for include the regular use of overdrafts or director loans, last-minute payments to suppliers or HMRC, and an ongoing sense of financial firefighting. These patterns may initially be dismissed as seasonal or circumstantial but if left unchecked, they tend to become entrenched.
This is where you can help clients to step back and reassess. Analysing recurring shortfalls, improving forecasting discipline and supporting changes to payment terms or cost structures can all ease the pressure. Most importantly, acting early gives your client options – before reactive decisions or external intervention become necessary.
What’s happening with their tax obligations?
Falling behind on VAT, PAYE or corporation tax is a common early sign of distress. It is often a tactical decision to prioritise payroll or suppliers, but this can quickly create longer-term complications.
Time to Pay arrangements with HMRC are a useful tool. However, repeated reliance on them indicates underlying strain. In some cases, the business may not be generating enough to cover its core liabilities. And that calls for a more strategic conversation.
Flagging up any tax arrears and helping clients to understand the potential consequences (including personal liability in some cases) can be a key turning point in prompting action. You may also be able to support them in identifying restructuring options or cash-flow improvements to bring payments back on track.
Building a more collaborative approach to risk
Most firms already have internal processes in place to track financial risk, whether through client segmentation, periodic reviews or dashboard alerts. But the greatest impact often comes from taking that insight into the client relationship and using it to shape more forward-looking conversations.
Consider using your internal red flag indicators to initiate regular check-ins. Even short quarterly meetings can provide the structure needed to track performance, identify new risks and discuss potential changes. Framing these conversations as part of a shared strategic focus helps to deepen trust and engagement.
This kind of collaborative approach not only supports earlier intervention, but also helps to reinforce your role as a long-term adviser, not just a service provider.
Know when to escalate
Despite proactive steps, there will be times when a business is close to insolvency. If a company is unable to pay its debts as they fall due or its liabilities exceed its assets, it may be time to involve a licensed insolvency practitioner.
Referring early can make a material difference: directors receive better advice; there is more flexibility in terms of rescue or restructuring options; and creditor engagement is often more constructive.
If you don’t already have a relationship with an insolvency practitioner, it is worth building one. Having a trusted referral route in place allows you to act quickly when needed and protects your role as adviser, ensuring that your clients are supported by the right expertise when the situation moves beyond your remit.
Final thoughts
Financial distress rarely arrives overnight. It builds gradually through late payments, creeping costs and a pattern of difficult decisions that go unaddressed. And while directors may not always see it coming, you often will.
By maintaining regular dialogue, using your data insight to raise concerns early and offering practical steps before the issues escalate, you play a central role in helping your clients to navigate uncertainty with confidence. These conversations might not always be easy but they are essential. And more often than not, they are where your true value as a professional adviser is most clearly demonstrated.
Author bio
Marco Piacquadio is Director at FTS Recovery and FA Simms.
