Top 5 Causes Of Insolvency In Business
A company can find themselves in financial difficulty for a number of reasons. There is no universal cause of insolvency, as this will vary from business to business depending on the individual circumstances. That being said, it is important for directors to be aware of the most common causes of insolvency so that they can spot the warning signs and prevent the company’s finances from deteriorating. These are the main causes of insolvency to be aware of:
Cash Flow Problems
One of the most common causes of insolvency is loss of cash flow. Issues with cash flow can happen gradually and for a number of different reasons. Credit problems, a buildup of bills and delays on payments can all cause cash flow problems to accumulate and send the company into financial distress. Being aware of the main signs of cash flow insolvency will help you to spot signs of trouble early on, and prevent your company from becoming insolvent. If invoices and expenses are building up whilst sales are slowing down, this is a key indicator that your company is facing financial difficulties.
Loss Of An Important Client
If your business relies on a key customer or client for a large percentage of its profits then the loss of this client could cause huge financial difficulties for your business. In order to prevent this from becoming a cause of insolvency, where possible, avoid becoming over-reliant on one client or customer, and focus on ways that you can acquire new ones. Making sure that you have alternative sources of income established is essential for preventing your business from facing large financial losses if a client decides to stop using your services, or if they end up in financial difficulty themselves.
New Competition
Another one of the main causes of insolvency that is often overlooked is the emergence of new competition within your business sector. Whilst competition can be a cause of insolvency, it’s not always bad for business. In many ways it validates your business or pushes you to adapt and progress. However, if directors do not keep an eye on competitors and market changes then they are at risk of losing customers to new competition and therefore losing profit.
Mounting Debts
When a company is defined as insolvent this means that they are unable to pay their debts on time, and so you won’t be surprised to hear that one of the main causes of insolvency is mounting debts. The more debt you take on, the greater the risk, and so it’s crucial to stay on top of your debts and avoid over-borrowing. Only incur debts if you’re positive that you can pay them. This will allow you to remain in control of your company’s finances and prevent debts from reaching unmanageable levels.
Lack Of Financial Information
When a company fails to keep accurate records of their finances, this can be a major cause of insolvency. Without an in-depth understanding of your company’s finances, it’s impossible to get an accurate picture of how the business is doing and to spot any signs of trouble. Maintaining reliable financial information is crucial for keeping track of your business’ successes and struggles, whilst helping to plan for the future.
If you think your company is facing insolvency, it’s important to seek the advice of an insolvency professional as early as possible. Spotting signs of trouble early on will provide you with more options for your business. Don’t hesitate to get in touch with the team at My Liquidation for confidential advice from our experienced team of insolvency professionals.
