Bankruptcy rarely looks like “we were working yesterday and shut down today”. More often, it is a chain of small decisions, each of which seems manageable on its own: delaying a supplier payment, borrowing money for payroll, postponing taxes or signing another contract “so we have enough to settle up”.
Construction and renovation have a long operating cycle: money goes into materials and advance payments, while receipts from the customer depend on acceptance and payment dates. A cash flow gap can arise between those dates.
Below, we look at how to assess a company’s bankruptcy risk from its figures and actions, and what to check if you are considering working with it. Throughout, I draw on financial risk management principles and the basic reports a business owner needs.
Contents:
What does “soon” mean when discussing bankruptcy?
The timing of receipts and payments matters when assessing financial risk. If a company loses track of dates, plugs cash shortfalls by shifting money around and lives from one advance payment to the next, check which obligations it will be able to meet and when.
The scenario is familiar: a contractor has completed a stage, acceptance certificates are held up, the customer postpones payment, suppliers want their invoices paid and tradespeople are waiting for their money. Without proper records, the manager sees only the bank balance and conversations in messaging apps.
Under Russian law, the bankruptcy of a legal entity means its inability, as recognised by a commercial (arbitrazh) court, to meet its monetary obligations to creditors in full, pay wages and severance benefits to employees and/or make mandatory payments. This legal definition is set out in Article 2 of Russia’s Federal Law No. 127-FZ; see the Russian Federal Tax Service’s explanation of corporate bankruptcy (in Russian). Early financial warning signs require investigation and do not, by themselves, establish this legal status.
Financial warning signs that appear first
The first point to understand is that profit and money in bank accounts follow different rules. A company may sound “successful” and have a strong order book while its liquidity is deteriorating.
To assess its financial position, examine its historical cash flow statement, income statement (profit and loss statement) and balance sheet. These show receipts and payments that have already occurred, the financial result, assets and liabilities. To check whether money will be available on future dates, also prepare a cash flow forecast or a payment calendar.
| Warning sign | What should you check? | Why is it dangerous? |
|---|---|---|
| Payments are postponed every week | A payment calendar for the next 6–8 weeks | The company is living from day to day and losing control |
| Amounts owed to suppliers grow faster than revenue | Accounts payable and how long payments are overdue | Materials may become unavailable and deliveries may be restricted |
| Receivables exist only “in messages” | A payment register tied to contracts and acceptance certificates | The money is nominally “owed”, but does not actually arrive on time |
| Projects finance one another | Separate records for each project | Check each project’s profitability, cash timing and contractual restrictions: cross-financing alone does not prove that a project is making a loss |
| The share of loans and stopgap borrowing is rising | The loan repayment schedule and interest | Expensive borrowing eats into margins and reduces room for manoeuvre |
Another indicator is net working capital: current assets minus current liabilities. A decline may limit the company’s ability to finance work until the customer pays. A positive figure does not guarantee that cash will be available on the required date: funds may be tied up in inventory and receivables.
In construction, funds are often “locked up” in materials and stages that have not yet been signed off. The manager sees a stocked warehouse and assumes everything is under control, even though obligations fall due before the next payment arrives.
Behavioural signs of financial difficulties
A company facing financial difficulties may develop certain habits, such as trying to speed up agreements “on a verbal basis”. Assess these actions together with its financial data.
A hypothetical example: a supplier writes “payment today”, the manager replies “tomorrow”, and tomorrow it becomes “on Monday”. A month later, the supplier withdraws credit, work stops on site, the customer sees deadlines being missed and a wave of claims begins.
These are the signs commonly visible from outside that should be treated as red flags:
- repeated requests for more time to pay, without a specific date or written agreement
- talk of “paying from the next project” instead of a plan for the current one
- sudden changes to terms: requests for an advance “outside the contract” or for payment to third parties
- missing supporting documents: invoices, acceptance certificates and completion paperwork take weeks to move forward
- staff turnover inside the company: accountants, procurement staff and site managers leave one after another
A lack of management visibility often compounds the problem: personal money, employee expense advances and project funds are mixed together. This “mixing” creates the illusion that there is enough money until a mandatory payment falls due. Problems with employee expense advances can reveal this particularly quickly.
For a closer look at the management accounting mistakes that most often lead to financial difficulties, read five management accounting mistakes (in Russian).
How can you reduce the risk as a customer or business partner?
A company in financial difficulty can pose a risk to a business partner even without dishonest intent. For example, it may promise a deadline when its money has already been allocated and purchases have been made for another project; a shortage of funds may become apparent a couple of weeks later.
If you are choosing a contractor or supplier, the aim is straightforward: reduce your money’s and your results’ dependence on someone else shifting funds around to cover shortfalls.
- Link payments to stages and acceptance certificates. The shorter the acceptance interval, the smaller the amount at risk in each payment.
- Document payment rules and the consequences of overdue payments. This is part of managing a business partner’s credit risk.
- Ask for transparent records of employee expense advances and purchases. If purchases are tracked “in a notebook”, the project will face a budget surprise.
- Check the contract’s legal risks. In practice, problems grow out of gaps in contracts and acceptance procedures, then turn into disputes. The blog has a guide to construction contract risks (Russian legal context; in Russian).
If a contractor does enter bankruptcy, the customer faces specific risks and restrictions when seeking repayment or making claims. Understanding the process in advance is useful: see the risks of a contractor’s bankruptcy (Russian legal context; in Russian).
When the risk is inside your company: a 14-day plan
Taking on new obligations in the hope that “the next money coming in will sort everything out” can increase risk. Before deciding, check the profitability of the new work, the timing of receipts and payments and your ability to meet existing obligations.
The plan below helps you regain control of data and obligations. Fourteen days is an organisational guideline for an initial review. The actual time needed depends on the state of the records and the agreements involved; completing the plan does not guarantee that financial problems will be resolved.
- Step 1. List mandatory payments for the next 30 days: wages, taxes, rent, key suppliers and loans.
- Step 2. List expected receipts with dates and conditions: which acceptance certificates have been signed, which stages are ready for handover and where approval is held up.
- Step 3. Prepare a payment calendar or cash flow forecast based on expected receipts and payments, and identify possible gaps between dates. A historical cash flow statement shows money movements that have already occurred; for guidance on its structure, see the cash flow statement guide.
- Step 4. Stop leakages: employee expense advances without expense reports, purchases without limits and personal spending from project funds.
- Step 5. Discuss shorter stages and faster acceptance with customers; document the payment dates you agree.
- Step 6. Recalculate the profitability and cash needs of projects with insufficient margins, and check the income statement. Agree any changes to prices or deadlines, or any suspension of ongoing work, with the customer, or rely on grounds provided by law and the contract. For the Russian context, see the Russian Supreme Court’s guidance on performing obligations, paragraphs 10–14 (in Russian).
- Step 7. Decide on a reserve: without a “cushion”, a delay in receipts may lead to another cash flow gap. For the practical details, see how to build a reserve fund.
This plan looks simple because it is simple. The difficulty lies elsewhere: data must be collected regularly, otherwise the whole exercise will need repeating a month later.
Which tools help keep the situation under control?
Risk management depends on disciplined records of what has actually happened: payments are recorded, expense categories are consistent, profit is calculated by project and receivables are tracked in a register. This is the basic logic of financial risk management.
For a project-based business, separate records for each project matter: they make it easier to assess each project’s profitability and cash needs, then reconsider how to proceed. Relevant reading includes the guide to business analytics (in Russian) and material on how an owner can work with the three main reports.
The next question is convenience. When records live in spreadsheets and chats, data arrives late and decisions come even later. Many teams therefore move to dedicated accounting services; this guide explains how to choose one: management accounting software (in Russian).
In 101, you can track receipts and expenses by project. The completeness of the analysis depends on the data recorded and your access rights. If you would like to see how this fits your own projects, advances, purchases and stages, join a presentation: it is easier to work through your situation there.
