Insolvency can be a virus for any company. That can severely hamper the brand reputation of the company or organization. Let’s first know the meaning of being insolvency. A business or any organization when unable to pay the debt in time or if it doesn’t have sufficient assets to cover all its obligations, then the company is called as insolvent. Keeping a close eye on the overall performance of the business and cash flow statements gives you an early warning about the future problems regarding the insolvency, and it would provide enough time to take action to avoid bankruptcy. So, business insolvency doesn’t happen overnight.
Insolvency would create a bad brand reputation that leads to loss of revenue, and investors lose trust to invest in your business. So, for the betterment of a company, one should maintain transparency of all the cash inflow and cash outflow statements. Even if your business is trading profitably, you are earning enough revenue, and you have enough capital, but you are in danger of becoming insolvent if you are unable to make payments as and when they are due.
There are specific steps that you can follow for the avoidance of the insolvency of a company.
1. Maintain Accountancy of your Company
For the betterment of the company, the accountancy is the much-needed service that you can set for the betterment of your business. Accounting and bookkeeping are two prime services that maintain the record of every transaction, analyzing the overall capital structure of the company.
Overall accounting can be categorized as a comprehensive and systematic way of analyzing, summarizing and preparing reports based on the transaction, taxation, and regulations. Many types of accounting can be included, such as management accounting, cost accounting and some basic accounting that help to make a business decision.
With accounting services, you can maintain track of the dues and payment of your company that will help you to estimate the dues and endangered condition of your company.
2. Cashflow Transparency
There should be transparent management of capital structure before the concerned employee of the department. Invoicing your employees and customers on time and regularly is necessary. Negotiate regular payments of the employees as well as the customers and the clients according to that pay their salary and clear their debts. Don’t let late payments go unchallenged.
Your business accountant or a licensed insolvency practitioner will keep a count on your business cash flow demands and supplies and may be able to identify the right solution that will steer you away from insolvency. The answer could be something as simple as selling some of your underused assets, or factoring out debtor invoices if they are generally paid on time, to obtain a quick injection of cash.
3. Control over Debtor Payments
Late payment for a long time to your debtor invoices is often one of the significant reasons why businesses struggle financially. That would lead to insolvency or bankruptcy, but the problem can be addressed by introducing stricter controls.
Having access to an old debtors’ records will highlight the details of the worst offenders, and identify any emerging patterns with customers who had previously paid timely and who didn't. You'll have a complete overview of how much is owed to the company, and what will be the next transaction while breaking down of each debtor’s account.
These are a specific indicator that something needs to be done when most of your debtors exceed their agreed terms and time for payment consistently, and you are suffering creditor threats or action against you.
4. Avoidance of Problems with Shares and Stocks
This could be a significant problem when you are unable to purchase the stock you need for your organization to fulfill demands because you’re paying late to your suppliers. If the bank has also refused to increase your overdraft, and there are few assets to leverage. Holding a bunch of shares can be a drain on working capital if it’s not sold quickly enough, then you may have to sell it in discounted the price. This might not show the immediate downfall of your company, but eventually, it can cause a huge problem.
Insolvency can be easily avoided, but generally requires awareness about the cash management of your company and acknowledgment that a problem does exist. For cash management proper accounting service and auditing service are necessary. We at JAXA provide world-class accounting services, auditing services along with that excellent tax handling procedures, VAT registration and all type of business consultancy are some of the remarkable services. Contact us to get an overview of our company and its services. We would be glad to help you at any step of your business incorporation.