How to Know If Your Business is Insolvent And How to Save It

Growing a successful business needs a lot of hard work and stamina. It is thus devastating for many to learn later on that your backbreaking work has not saved your company from becoming insolvent. Business failures and insolvency are common occurrences but they can be prevented if you are aware of the indicators of insolvency.

How to Know If Your Business is Insolvent And How to Save It

Many factors affect your business’s solvency, some of which will be beyond your control (e.g. economic crisis). In this article, we walk you through 14 situations signifying that your business is at risk and is headed for financial trouble or is already in financial trouble. Use this list to guide you in making decisions for your company because continuing to trade while insolvent may have negative repercussions not just on your business but also on the directors of the company who may be personally liable for decisions prejudicial to the creditors of the company under the Companies Act of 1993.

14 Signs of Insolvency:  

  1. Continuing losses.  
  2. Liquidity ratios below 1.  
  3. Overdue taxes.  
  4. Poor relationship with Bank.   
  5. No access to alternative finance.   
  6. Inability to raise further equity capital.   
  7. Suppliers placing the company on COD.  
  8. Creditors being unpaid outside trading terms.   
  9. Issuing of post-dated cheques.   
  10. Dishonoured cheques.  
  11. Special arrangements with selected creditors.  
  12. Solicitors’ letters, summons, judgments or warrants issued against the company.  
  13. Payments to creditors of rounded sums.  
  14. Inability to produce timely and accurate financial information.  

The list is not exhaustive, which means that there could be other situations that will indicate that your business is insolvent. The occurrence of one situation above does not automatically mean that your business is insolvent. Continuing losses do not always mean that you are unable to pay debts on time. Moreover, dishonoured cheques, which indicate a short-term shortage of cash, happen to all businesses all the time and do not indicate insolvency.

If your company is experiencing any of the above situations, that should make the director suspicious of insolvency. He should use the situations to make decisions that maximise profits and maintain good relations of the company.

Act fast.

Directors should act fast as soon as they have a suspicion of bankruptcy because acting too late may result in dire consequences for the company. The company can be placed in liquidation and the director may face punishment. Also, the collapse of your company will affect your employees, your lenders, your customers, and your suppliers.

Seek help.  

Ask for help when you need it. Some businesses do not seek help because, most often, they do not understand what is going on with their business. They cannot pinpoint the problems and thus cannot arrive at a solution. There are professionals with a long experience of turning around businesses and help them get back on track.

Be open to changes.

The professionals that will help you may suggest actions that you never thought you would do (e.g. additional financing could be one action that professionals may advise you to take). But be willing to discuss these proposed changes in-depth and be ready to execute these changes. After all, your main goal is to not put all your hard work to waste, save your business from collapse, and minimise the negative a collapse may bring to your employees, customers, and suppliers. 

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