6 key indicators of company insolvency you can’t ignore

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Insolvency is one of the most hated words in the corporate world. Amateur entrepreneurs, who have not even fully understood the concept or repercussions of insolvency, have to experience it due to various reasons.

It is important to note that a great majority of companies liquidate due to lack of solvency. Hence, if you find your business in any kind of potential financial risk, you should immediately consult a professional adviser.

Why Hire a Professional Adviser?

Insolvency advisers are professionals who assess your finances, highlight potential risks and help you devise strategies for managing the identified risks. When a company is close to insolvency, business owners and managers become so busy with managing the myriad of small issues that they end up ignoring the bigger picture.

The biggest problem with insolvency is that it can sneak up on you when you least expect it, leaving you wondering about what you could have done differently. Therefore, you need a long term approach to prevent insolvency. A professional insolvency advisor can help you identify the specific problems of your company and the key indicators of insolvency. For example, UK businesses can look to advisors like http://www.companyrescue.co.uk/ who provide you with the option of taking a free insolvency test online, and you can then choose to proceed with help if necessary. Once you’ve found the problem, you can then completely focus on managing it and devise strategies to avoid bankruptcy.

Common Insolvency Indicators

Here are the 6 key indicators of company insolvency that you simply can’t ignore.

  • Increased Loans

Are the suppliers refusing to provide you credit? Are your secured investments enough to meet the financial needs of your business right now? Can’t use personal assets to obtain a short-term loan for your business? Have your cheques started to bounce? Is a creditor company preparing to take any kind of legal action against you?

If the answer to any of these questions is ‘yes’, then it means that your business is definitely in trouble.

  • Repeated Payment Demands or Notices

Are you receiving payment demands or notices from the bank or creditors? Take them very seriously, because chances are that someone will eventually take legal action against your business.

Secured or unsecured creditors will usually send you emails or personal notices. However, beware of receiving a statutory demand. This is a legal notification of unpaid bills and means that the creditor is prepared to take legal action against you, if you do not pay the bills after receiving the notice. The last due date of bill payments is always mentioned in the statutory demand letter. The creditor can also file a winding petition if the bills are not paid on the given due date. A winding petition can cause your business to become insolvent.

  • Delayed Staff Wages

Staff wages are included among the necessary business expenses which need to be cleared before any other expense. Your profit is calculated after making all such payments. If you are unable to pay your staff on time, chances are that your business is close to insolvency.

  • Delayed Payments to Directors

Many companies freeze the directors’ payments to cope with financial instability. However, if this becomes a regular occurrence, then it is a clear indication that your business is not doing well.

  • Unreliable Information Management System

Cash-flow forecast, details of incoming and outgoing financial notices, reports of aged debtors and matured insurance, sales forecast, bank reconciliation and all such financial information needs to be carefully compiled and communicated through a proper channel. It is necessary to evaluate the performance of your business. If you do not have a proper information channel, evaluate the financial status of your business immediately.

  • Repossession of Goods by HP and Lease Companies

If you fail to make payments on time, HP and other lease companies will send you notices and representatives to sort out this matter. If you fail to agree to their offer, the lease companies and HP may repossess goods, which is a clear sign that your business is vulnerable to insolvency.

Three Ways to Evaluate Your Company’s Status

If you are still unsure about your company’s financial status, then it is important to consult financial advisors. Typically, they conduct three types of tests to evaluate your business, including the following.

Company Insolvency Test– This includes an evaluation of the company’s assets, the assets of stakeholders, and the business’ status compared to its competitors.

Cash-Flow Test – This includes various types of comparisons to find results, such as the inability to make the payments on time, lack of cash flow to meet the 21-day statutory demand, inability to pay bills or loan instalments on time etc.

Balance Sheet Test – The balance sheet test is successful if your assets are more than your liabilities. If the liabilities are higher than assets, chances are that your business will eventually fail to make payments on time. This is one of the most prominent indicators of insolvency.


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