Insolvency can quickly and quietly sneak up to a business, and by the time you realise it, it might be too late. A company is considered insolvent when it is unable to fulfil its financial liabilities and has debts that exceed the combined value of all its assets. In such a case the business would be unable to pay its necessary working capital and finally declaring bankruptcy will be the only solution.
Many people blur the line between insolvency and bankruptcy and consider them as the same thing. This does not seem right as insolvency is the inability to pay debts at the stipulated time. It could be resolved by taking a loan or borrowing money so that you could pay off the debt. When it comes to bankruptcy, it occurs when all the possible attempts to clear the debt fail.
Insolvency can be considered as the starting point from which a company can see only its downfall. Thus it is essential to look for the various signs of business insolvency. Some of the symptoms are given below:
1.Lack of Cash
If the business is continually facing a cash crunch, it could be considered as a negative sign for the company. All business periodically has bouts of such situation where there is a shortage of cash for even the day to day workings of the business. However, the business regularly faces such a situation then it is a warning sign for the company as this could mean that the business is spending more than it earns. To avoid such scenarios, it is essential to keep a track on the cash flow of the company that projects a complete movement of cash.
If your business is continuously unable to pay its bills, this would mean that the financial position of the company is not secure. This situation would ultimately lead to insolvency of the company and finally the liquidation of the company. It could also hamper your goodwill and reputation.
3.Lower Profit Margins
The main focus of a business is to make profits. If the profits margins of the business start to decline, then this could be a terrible situation for the business as it would not be able to cover its necessary operating costs and in the long run, will become insolvent. In order to prevent the same, you need to make sure that your accounting books are properly maintained.
If the records of the transactions are not kept properly, you will not be able to prepare precise financial statements. There should not be any gap or void in the timeline of the transactions as the improper recording of the various operations can mean significant losses to the company. Proper bookkeeping should be followed.
5.Liabilities more than Assets
Assets of a company are resources or things of value that are owned by a company. Similarly, liabilities are the legal, financial debts or other obligations which arise during the course of the business. If the business has more liabilities than assets, this would mean that it has more money going out of its cash flow than coming in and may create financial problems for the business shortly.
6.Reduction of Credit Limit or Rejected Loan by the Bank
Your banks would have their way of assessing the business’s profitability. As it would be the partner bank, it would recognise the early warning signs before you and, as a precautionary measure, would reduce the borrowing limit. The bank might even reject the loan application of the business as it would feel that the company will not be able to hold its ground in the near future.
7.Constant Remainders from Creditors
If the creditors are continually following up for payment, this may mean that they have slowly lost trust in you and your company. It would also seem that they could see the business dwindling soon. Thus, it is a very solid indicator that the business is slowly moving towards insolvency.
If you keep a lookout for these signs, there might be a chance that your company may bounce back from its insolvency situation by taking specific stringent steps and making changes to the business strategies. For starters, the debt must be reduced as soon as possible, whenever possible which would help in the balance of assets and liabilities. One can also look into the financial restructuring of the company.
If you are looking for any business related or legal queries, then look no further. JAXA would provide a customised solution to all your financial problems. It also offers a range of other business related services in UAE such as accounting services, business valuation, financial restructuring etc. For details regarding our services contact us, we would be happy to help.