What are the warning signs of an insolvent company?

If your company has failed to fulfill its obligations and repay the money it owes to other persons or companies it means your business has become insolvent. The simplest explanation is that when your company’s debts become higher than its assets (things you own), your business succumbs to insolvency. It is very important to notice the signs of insolvency because if you act accordingly you can prevent and solve that problem. This is not always easy because as a CEO you might be too busy or you might be focusing on one part of the business like income. We will describe some of the warning signs of insolvency and this can help you see if your company suffers from some of them. In that case, it would be wise you talked to an insolvency practitioner. Let’s check some of those signs.


You have crossed the borrowing limit


If your bank overdraft limit has been crossed, it might be a sign of future insolvency. This makes you unable to borrow more money without providing some personal guarantees that are to be considered. Since suppliers are refusing your credit, you might want to ask for a secured loan. However, if you don’t have sufficient assets you will not be able to obtain them either. If you fail to pay what you owe, your suppliers might issue a Statutory Demand for payment, which can lead you to legal issues. This can be one of the most serious threats for your business, although it is usually done only in cases when you owe a lot of money. Make sure to notice this on time and prevent it from happening.


You have no certain business information


Your business needs to have a good plan that will be a backup for any important financial decisions. You need forecasts, revenue predictions, income and outcome charts, debtors reports, sales forecasts, and many other different documents to have it all tied up and prepared for good business functioning. Having all this information you will be able to decide confidently and wisely about anything related to the financial part of your business. If you lack all of this, your business is a mess and it will be difficult to arrange everything once something goes wrong.


Demands for payment


Let’s say you have already received a Statutory Demand from your creditor. The consequences can be various but what is often done after issuing this demand is winding up a petition which can severely affect your business furthermore. The most serious consequence is that your assets get sold in the liquidation process if the creditors can prove you cannot pay your debts. If you have been pursued by the Taxation office you are already in a red zone, meaning that this is a bad sign for the business. There are penalties for not paying your debts on time but it is still better to pay them all than to wait for Statutory Demand and winding-up petition. You can notice the struggle with paying the debts if you need more time to pay them than it usually took before. Also, pay attention to your creditors’ complaints if there are any. If you notice that deliveries are delayed and that the production is falling, then it is time to run through your business and seek insolvency advice before these issues become worse.


You can’t pay your staff


The next bad sign that indicates possible insolvency is not being able to pay all the salaries of all of your employees. Even if you make the ends meet, the fact that you have struggled is a sign that something’s wrong. If your employees are not happy, this can lead to other problems, like lawsuits and them leaving the company. This way you lose the employees and still have the debt you have to pay.


Balance sheet test


We mentioned the inability to meet the deadlines for cash payments as one of the insolvency tests. Another one is a balance sheet test that serves to indicate if your assets outweigh your liabilities. In other words, it indicates if you own more than you are due. This test should be run by a specialist for insolvency issues to obtain the most accurate information. In case your liabilities outweigh your assets you won’t be able to pay the whole amount of your debts because even if you sell everything you will still lack money. Prevent this by an on-time insolvency analysis by a professional and start solving it if you see that your asset and liabilities are almost of almost the same value, and not when liabilities exceed the assets.


When running a business you need to look at everything as a whole and not focus just on one part of it, such as income. You might sell a lot but you can also have a lot of debts and you need a business plan that will have all the charts and reports that will give you a proper insight into everything. Pay attention if your business is prone to any of the described issues and even better, hire a professional to obtain insolvency advice and prevent any financial crash.

Comments are closed