What Are the Warning Signs of an Insolvent Company?

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What Are the Warning Signs of an Insolvent Company?

Mon, 04/16/2018 - 07:00
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If you are a business owner or a CEO of a business, you may get carried away with your day-to-day tasks and fail to see the big picture. If most of your daily work is focused on patching things up, this means that you are coping, rather than existing as a sustainable business. Coping for too long could get you in a place where you never wanted to be. Constantly monitor for the signs of insolvency and reconsider your strategy in order to save your business.

The lack of demand

Some signs are subtler than others. This could be interpreted as a warning sign that you may be heading the wrong way. If there is a noticeable lack of demand for your products or services, if there are no big orders in sight, and a particularly lucrative contract with a customer is about to expire, you need to act quickly. A business’s cash flow cannot afford to stall, as there is no way of pausing the expenses. Get into a guerrilla campaign and quickly find new customers

You are using your own money

This practice is particularly noticeable with SMEs. A business owner uses their personal funds to help the company pay for its expenses. It is preferred that this never happens, however, even if it does, it mustn’t happen often.

Constant pressure from creditors and suppliers

If your accounts department has to deal with threats and warnings daily, coming from unhappy suppliers and banks, it is a clear sign that something is wrong. This negative energy can serve as a reminder that you are not doing something right. This is a clear indication that you are constantly late with your payments.

Disrupted chain of supply

The previous point inevitably leads to this one. If you fail to pay your suppliers, they will refuse to provide any further goods and you may be unable to meet the orders you have from your customers. The delay is a warning in its own right, but it could also lead to further trouble. You could start losing customers due to this issue, and the desperately needed profit along with them.

Cutting costs

Cutting costs does not have a good connotation in the sense of not being wasteful and lowering your expenses. What it usually means is revising a business’s structure and dropping certain parts which were otherwise considered substantial. This infamously involves layoffs. This type of activity is usually performed when a business cannot afford some of their basic expenses such as workers’ wages.

You can’t get credit

You may be used to getting short-term loans for quick campaigns and good ROIs. If banks reject your loan requests, and you have reached your overdraft limit you are approaching insolvency. If the only way to borrow money is by providing a personal guarantee, do not do it. Resort to it if you have an excellent plan and a realistic idea of how you can use that money to help your business. What usually happens at the same time is that your suppliers now expect cash on delivery which can be hard to provide and is a clear sign of lack of trust.

Inability to repay debts

It could happen that you are so deep in debt that you cannot even return the funds owed following a court order. By this point, you are probably aware your business is insolvent. This is the right time to resort to creditors voluntary liquidation to save yourself from any further legal actions.

Run a test

If you ever suspect your business is taking a direction you did not want it to take, run a test. Monitor your cash flow and see whether you are able to pay your outstanding bills at any given time, within a reasonable period. Also, hire an expert to do a balance sheet test. They will assess the value of your assets and compare them with your liabilities. If the value of the liabilities exceeds that of the assets, you are insolvent. Always check both criteria to ensure that the results represent the true state.

In order to spot the early signs of insolvency or signs of actions which could lead you to insolvency, always have financial reporting you can rely on. In fact, the last two tests, should not only be done on an occasion when you suspect insolvency. They provide data a business should be aware of at all times. Good accounting, bookkeeping, and financial reporting will make your finances transparent and easy to address the moment they become an issue.