Insolvency — it’s a prospect every business owner has nightmares about, even if everything seems fine at the moment. But what leads to a business becoming insolvent, and how can you, as owner, see the signs that you’re at risk?
Why Does a Company Become Insolvent?
Insolvency can be the result of a company no longer being able to pay its way. It may be unable to meet its debts or have more liabilities than assets, but one of the options available to the directors is to apply for insolvency.
There are various reasons why this might happen:
- Lack of cash flow to cover your running costs.
- Falling levels of business or new customers due to increased competition.
- If you rely heavily on one customer, losing that customer can severely impact your income.
- Long-term debts, which grow with interest until you’re unable to repay them.
- Not being able to rely on a stable level of sales can make it hard to invest in your business.
- Departure of a team member whose skills or knowledge are hard to replace can have a negative effect on the company’s operations.
- If you’ve borrowed heavily, any slump in sales can expose you to a position of being unable to make repayments.
Signs to Look Out For
Forewarned is forearmed, they say, and spotting the warning signs in your business early can allow you to take action. So what are the signs you need to look out for?
According to the Institute of Chartered Accountants in England and Wales, the most typical signs are:
- Higher spending than earning over a substantial period.
- Lenders imposing stiffer interest rates because they see you as a high risk.
- Defaulting on bills on a long-term basis.
- Suppliers cancelling vital supplies due to outstanding debts.
- Failure to chase debts owed to you.
- Growing costs and falling income leading to lower margins.
- Look out for staff dissatisfaction, especially among senior staff — they can often sense that something’s wrong.
What to Do About It
If you see any of these signs in your business, it doesn’t mean you’re finished — but the time to act is right away. Taking prompt steps may allow you to avoid the need for insolvency.
There are some great business advisors out there, and I can recommend several. On the other hand, if part of your problem is from debts that your customers owe you, you’re very welcome to give me a call to discuss how I can help you.