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An insolvent business is a bomb waiting to explode- how solvent is yours?

Written by: Mark Gwilliam

Article Overview: Every business, be it a huge corporation or a small home-based business, will encounter some cash flow problems at one point or another. It becomes a serious issue when your business seems to be in financial difficulties on a continuous basis. If this rings true to your business, then you may need to take a long, hard look at how solvent your business really is. Insolvency is when a company is unable to pay its debts when they become due. In other words, the business is spending more than it is earning.

An insolvent business is a bomb waiting to explode- how solvent is yours?

There are two primary ways to determine whether or not a company is solvent. First, the assets on the balance sheet should exceed the liabilities, yielding a positive owners’ equity. Second, there should be a positive cash flow at the bottom of the statement of cash flows. This essentially means that the business is receiving enough income to cover its debt payments on time.

Cash flow problems that are not quickly resolved can lead to some very serious consequences for your business. If you don’t curb them in time, not being able to pay your debts will result in you having to declare bankruptcy and close your business altogether. In many cases, by the time a business realises that it could possibly be at risk of insolvency, it is already too late.

In order not to let this happen to you, it is important that you are able to spot and heed the early warning signs of an insolvent business. Some of these are:

• The cash balance in your bank account is diminishing and your overdraft has drastically increased

• Rising inventory levels in the face of decreasing or static sales

• Continuously deferred customers debt collections

• Habitual late payment of supplier invoices (suppliers are unpaid for more than 90 days)

• When creditors start asking for cash immediately after delivery

• An escalation in the search for suppliers who are willing to give more credit

• An increase in the number of final demands received

In case your business is already experiencing one or more of these insolvency symptoms, you must solicit some serious professional help or get in contact with an insolvency specialist. If you are able to catch on to the signs early enough and take the correct action, there is a good chance that you may be able to save your business from bankruptcy and complete extinction.

For more information on how to save your business if it is in trouble, see my article called The Top 5 Warning Signs that your Business is Declining.

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Article Tags: balance sheet, bankruptcy, cash balance, cash flow problems, creditors, debt collections, debt payments, debts, early warning signs, escalation, extinction, good chance, insolvency specialist, inventory levels, liabilities, overdraft, positive cash flow, supplier invoices, time cash, warning signs that



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