How Do You Identify Insolvency Problems?

Business woman looking stressed out

If your business is struggling financially at the moment then you might be concerned about facing insolvency. In business terms, a company becomes “insolvent” when it can no longer pay its debts. This means that either the company cannot pay its bills as they fall due, or, has more liabilities than assets on its balance sheet.

Whilst insolvency is never a position that business owners want to find themselves in, it’s best to spot the early warning signs of insolvency problems, rather than waiting until the company is in a real financial crisis. Spotting insolvency problems early on allows company directors to liquidate their company in a controlled manner via a voluntary liquidation. This will allow directors to trade again in the future and prevent further legal action from being taken against the company.

With this in mind, if you’re concerned about your company facing insolvency problems, these are a few of the key signs to look out for:

Cash flow problems

It’s not uncommon for companies to go through temporary cash flow problems, however, if the issue becomes more constant, this could be a sign of an insolvency problem. If invoices and expenses are piling up whilst sales are slowing down, take a look into what’s causing the problem to see if it’s a permanent issue or a temporary blip. You can do a cash flow test by looking at your company’s current obligations and near future payments and determining whether or not you can meet them based on your current cash flow situation.

Pressure from creditors

If you’re having to pick and choose who to pay each month, this is another potential insolvency problem. It will also be damaging to your creditor relationships and means you’re likely to face mounting pressure from the parties that are owed money by you. At its worst, you may see legal action being taken by creditors such as the issuing of a CCJ or statutory demand. If your business is struggling to pay its debts, it’s best to try and get creditors on side as early as possible by looking at the various company rescue insolvency options. If a company closure is likely, it is best to look at a Creditors’ Voluntary Liquidation (CVL) rather than leaving it to creditors to take action which could result in a Compulsory Liquidation. To understand the difference between the two, read our detailed comparison.

Maximum borrowing limits reached

If your business is constantly in its overdraft and has exhausted all avenues of credit, this could be another insolvency problem. If you’ve reached all borrowing limits with the bank, this is a sure sign that it’s probably time to look at an insolvency procedure, such as liquidation, rather than letting the company slide into further financial crisis.

Mounting debts due to HMRC

Failing to pay business taxes on time could result in the issuing of a winding-up petition for compulsory liquidation or legal action. Business directors who are struggling to pay their taxes will sometimes delay submitting tax returns in order to avoid payment. This will not only incur an added interest fee but also run the risk of additional penalties being added to the existing debt. Failing to pay HMRC debts could also result in personal liabilities for directors.

Late payment interests and charges

If you are failing to pay debts or making payments late, you’ll notice that you’re paying interest payments and charges more regularly. This is a sign that there is a potential insolvency problem, and that the situation needs to be looked into as quickly as possible.

The balance sheet test

A company is insolvent if its liabilities are greater than its assets, and you can check for an insolvency problem by assessing exactly that. The balance sheet test looks at all your company’s assets (stock, property, vehicles etc.) and places them against any debts your company has (to creditors, HMRC, employees etc.). If the comparison shows your debts to be greater than your assets then this is a key indicator that the company is facing insolvency.

Steps To Take If You Think Your Company Is Insolvent

If you’ve noticed any of these warning signs within your business and are concerned that it might be insolvent, don’t hesitate to seek professional advice from a licensed insolvency practitioner. Placing your company into voluntary liquidation will help you to claim what redundancies/ entitlements you can and to protect yourself as a company director. Get in touch with our friendly and experienced team today who will guide you through the next best steps for your business.

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