Insolvency and your business
First of all what is insolvency? Insolvency is a term for a firm or individual who is unable to meet their financial obligations. Therefore in danger of being closed down due to outstanding debts. Here are some quick key points you need to know of insolvency:
- Company has more liabilities than assets
- Financial distress where a person or business cannot pay their debts
- Insolvency can arise from poor cash management, reduction in cash flow or an increase in expense
- Contacting creditors directly about insolvency will help restructure debts to pay them off
Keep in mind however, that insolvency is not the same thing as bankruptcy. It is stated by the IIR that a person is insolvent when the total liabilities exceed total assets, whereas bankruptcy is how a business will pay off their creditors from a court order. If declared insolvent there are options to make this manageable.
Types of insolvency
There are two types of insolvency: Cash-flow and balance sheet.
Cash flow insolvency: This insolvency refers to lack of liquid assets to pay off creditors. You will theoretically have enough assets, but not the appropriate form of payment.
Balance- sheet insolvency: On the other hand, balance sheet insolvency has negative net assets and cannot meet financial obligations to creditors. This will ultimately lead to a high possibility of bankruptcy.
Factors which lead to insolvency
There are multiple factors which can lead to insolvency. For instance:
- Inadequate accounting or human resource management. Those who lack experience and skills may not follow the company budget and expenses. So, sooner or later this can lead to dilution of company resources and inadequate revenue.
- Rising production costs. Sometimes a business has an increase for their goods and services, which is then passed along to the consumer. These consumers however, may take their business elsewhere, losing both clients and income.
- Unable to cater to customer needs. The desire and interest of customers are forever changing. Companies need to constantly keep up and adapt with these changes, before their customers change to a different company who meets their interests.
- If a business has become subject to multiple lawsuits, they will suffer from paying large amounts of money in damages. Consequently, leading to an unviable business.
How to deal with insolvency
There are a few ways of dealing with insolvency. Getting in contact with an insolvency practice will help talk you through all your options. For instance, Connect Insolvency will talk to those experiencing financial difficulties in both a personal and professional manner. They will provide rescue and closure options, as well as any information to help. Furthermore, there is also the option of liquidating your company. In other words, closing down the company and selling the assets.
How you can reduce insolvency
Here are a few steps to avoid insolvency and protect your business. As keep in mind that no business goes insolvent overnight:
- Get good financial and legal advice at the first hint of trouble
- Reduce business expenses. This can involve restricting overtime and cutting hours with staff, and cutting overheads such as advertising.
- Focus on cash flow. For instance, invoice promptly, recover debts, sell assets and plan stock reduction.
- Discuss your problems with your creditors!
We recommend seeking help at the first hint of financial trouble you come across. The quicker you go and get help, the easier a practitioner can deal with your case and give you advice. Therefore putting a stop to your business going into liquidation.