What are the Top 10 Causes of Insolvency in the UK?

Poor financial management, bad leadership, a lack of vision, poor financial planning, or bad organisation can all lead companies towards financial disaster and insolvency.

Whether your company is turning over millions or struggling to pay its bills, knowing what the top causes of insolvency are will help you to stay financially solvent and remain profitable.

In this article, the team at Irwin Insolvency explores the top 10 causes of insolvency in the UK, so you know exactly what to look for.


1. Cash-Flow Problems

Insolvency occurs when your business can no longer pay its debts. If your company has cash-flow problems, it stands to reason that it will struggle to pay its bills.

If you cannot pay the rent for your office or there’s not enough cash to pay wages, your company cannot continue operating. Even if cash-flow problems are fixed in the short term, you can be left with increasing debt or interest payments in the long term.

Cash-flow problems can quickly lead to insolvency, so it’s important for company directors to keep on top of their accounts, and ensure there’s enough cash in the bank each month to cover overheads.

2. Lack of Financial Reserves

With no financial reserve, your company can experience cash-flow difficulties that lead to a state of insolvency.

Company directors should always ensure there’s a financial reserve that can be used to pay for unexpected bills or cover expenses if there is a downturn in trade or profits.

If financial reserves are used, company directors should always endeavour to rebuild and replace them at the earliest opportunity.

3. Demands for Repayments

One of the major causes of insolvency in the UK is the demand for repayments by creditors and suppliers.

If your company owes money and begins missing payments, you could be served with a statutory demand for payment. This is a legal demand that forces you to make the payment or run the risk of being forcibly liquidated.

If you’re struggling to keep up with demands for repayment, this is a strong indicator that your company is facing insolvency and you should act quickly to restore your cash flow.

4. Missed or Late Client Payments

While we generally associate insolvency with a company being unable to pay its bills, one of the major causes of insolvency can also be missed or late payments on the part of its clients.

If your company is owed money by customers or clients, your accounts can be left in the red. Late payments have a knock-on effect, forcing you to borrow money to cover short-term financial gaps or leading you to begin missing payments to your creditors.

5. Inaccurate Accounting

In order to understand your company’s financial position, it’s vital that the company keeps thorough and accurate accounting records. After all, if you have no idea how much money is coming in and going out, you have no idea how close to insolvency the business might be.

As a business owner, record keeping should always be a priority. Excellent accounting records allow you to track expenditure, sales, turnover and profit, not only allowing you to stay solvent but to identify areas for growth or improvement, too.

6. Loss of Important Clients

Cash-flow problems and insolvency can be directly caused by the loss of important clients or a loss of customers. Lose clients, and you’ll find that your accounts begin to suffer as income decreases.

Insolvency can even be caused by the loss of a single client, particularly if it’s unexpected or if the client in question makes up a disproportionate percentage of the company’s turnover or sales.

For this reason, it can be useful for companies to stay diversified, to take on new clients and customers, and to keep robust reserves of cash in case of emergencies.

7. Increased Competition

Increased competition is one of the leading causes of insolvency in the UK. The arrival of new competitors in the market can result in a direct loss of customers or clients, which leads to a loss of income for your company.

Staying competitive is integral to staying solvent, and it’s important to remain aware of the arrival of new or rival businesses entering the market. Equally, it’s important to stay competitive in order to not only retain your existing customer base but to grow your share of the market, too.

8. Bad Management

Insolvency can simply be caused by bad management practices. It takes skill, expertise, knowledge and experience to run a successful company, and bad or inexperienced decision-makers can quickly drive a business into financial distress.

Directors should seek expert advice in order to stay solvent, remain competitive and achieve growth rather than stagnation. Professional insolvency practitioners can assist during decision-making processes by providing impartial expertise to directors.

9. Poor Leadership

While it’s essential that companies are well organised and efficiently run through excellent management practices, it’s also important that directors show leadership if they desire to stay solvent.

It’s not always enough to run a company well. In order to stay ahead of the competition, it’s often necessary for directors to demonstrate vision and leadership that drives the business forwards, rather than backwards.

10. Major Political or Economic Events

No matter how well the business is run, insolvency can be caused by events outside of the director’s control. We saw this during the pandemic when businesses were forced into insolvency due to the effects of Covid-19.

Pandemics won’t be the only cause of insolvency, however. Businesses can be negatively affected by financial crashes, political events such as Brexit, or conflicts taking place in other parts of the world.

Contact Irwin Insolvency Today for Your Free Consultation

If your company is facing insolvency, the expert team at Irwin Insolvency is here to assist.

Knowing the top causes of insolvency in the UK can help your business to remain profitable. Our experienced consultants are ready to provide the expertise you need to survive through our range of company insolvency services.

If your company is struggling financially, contact Irwin Insolvency today for your free consultation.

Contact Irwin Insolvency today for your free consultation

Call us
0800 254 5122

About the author

Gerald Irwin

Gerald Irwin is founder and director of Sutton Coldfield-based licensed insolvency practitioners and business advisers, Irwin Insolvency. He specialises in corporate recovery, insolvency,
 rescue and turnaround.