What Are the Warning Signs of Insolvency ?

What Are the Warning Signs of Being Insolvent? Intelligenthq

Insolvency is not a word that business managers or corporate bosses want to hear too often but unfortunately it does become a reality for a large number of companies every year. When a company becomes insolvent  it does not have suficient assets to cover its debts and it´s unable to pay its debts as they fall due. In simple terms, to become insolvent, means that a company owes more than it owns.

There are various Insolvency procedures available for companies. With the right help and advice, financial ills can be remedied but ignoring the warning signs can make matters much worse.

Here’s a rundown of 4 clear insolvency indicators:

Cash flow concerns

A lack of cash flow isn’t necessarily in itself an indication of insolvency but if your company cannot afford to invest in important or essential ways then you may have underlying problems to address. Over time, cash flow failings will tend to worsen unless they can be overcome quickly simply because financial difficulties can affect all aspects of a business, particularly within the context of small-scale operations.

Creditor pressure

When you’re struggling to keep up with demands for payment from your creditors, whether it’s your bank, mortgage provider, your credit card company or any other lender, it could be that you’re not far from insolvency. If you can find an agreeable solution in good time then the situation might well be manageable but if creditor pressure becomes a constant headache then the reality is that you might soon be out of business unless action is taken.

Five Warning Signs of Insolvency Intelligenthq

Regularly being late with payments

Keeping up with financial obligations can be logistically challenging for companies as it can be for individuals but if your business is regularly and routinely late making important payments then that could be a sign of deep rooted problems. Late payments can impact your company’s credit score, which can have long term consequences, but it also suggests that you are operating at too close to or perhaps even beyond the limits of your company’s solvency and sustainability as a business.

Maxed out borrowing

Borrowing money and using credit facilities is very often an important part of being a business and targeting growth but if your company is consistently at the very outer reaches of the facilities available then insolvency might not be far away. When this situation becomes the norm it is referred to as ceiling borrowing and is generally taken as an indicator of a company being close to insolvency and on the brink of financial collapse.

Director pay freeze

When a company’s financial situation is bad enough to mean that their directors are not being paid then this has to be taken as a clear warning sign that danger may lie ahead. Even when directors agree that a pay freeze is in the best interests of the company’s longer term future, being so deficient in funding can only be reflective of serious underlying problems and potentially unsustainable circumstances.

From the perspective of company directors, the kind of financial pressures outlined above present a variety of challenges. It is important though for company bosses to realise that they have a legal obligation to act in the best interests of their creditors when their company becomes insolvent. Failing to do so could lead to a team of directors being accused on behaving fraudulently or trading in a wrongful manner. The consequences of which can be more wide-reaching and damaging for directors than the process of entering and dealing with insolvency directly.

Bio – Mark Halstead is from Red Flag Alert, part of the Begbies Traynor Group, and is now in his 10^th year with the business. He’s worked at companies across the financial services industry and is a fellow of the Institute of Sales and Marketing.