Liquidation is the winding-up of an organisation where the management sells all the assets of the business and distributes them among the shareholders of the company. The company liquidation typically occurs when a limited company has reached a point where for one reason or another, it has is decided by the board of directors and the management that the business is not able to continue or should cease all its business activities. There are a number of factors that can lead the management to reach this decision
The number one reason for the liquidation of a company is insolvency which means that the business does not have enough funds to continue the business activities. Improper capital management, unsuitable cash flow and wrong business decisions can all be factors leading to the winding up of a company. There can also be cases where In cases where the management of the business mutually decides to shut down the business activities.
The reasons to opt for company liquidation can be numerous. Few of them are –
1.Lack of Effective Planning
Planning is required in every stage of business. If things are not adequately planned, there is a chance that the results will not come according to what has been expected. A primary reason for company liquidation is a lack of adequate planning. When things are not adequately planned, they make no contribution to the progress of a company as a whole.
2.Lack of Adequate Working Capital
Running a company requires an investment that is not fixed and can be quite greater than the expected amount. If a business owner wants to survive in the market, they need to possess adequate capital for the working of the business. It will not be an excellent option to rely on the credit lines as they lack full control of the person. Due to the presence of this issue, it is considered necessary that if a business is not performing well, it is better to wind up the company.
3.Excessive Debts and Lack of Stable Sales
When your business is accomplishing well, paying back debts and dealing with the cost of property rental is easy to manage. However, a single month of bad sales is often all it takes to cause your debt-related costs to exceed your monthly income. Borrowing excessively places your company. A single period of low sales can lead to its failure. Therefore prepare ahead of time by keeping cash within your business to make up for temporary downturns in sales and revenue.
4.Poor Retention of Important Employees
Just like losing a vital customer can lead to the failure of your business, failing an essential employee can also lead to the weakening of the organization. If your business is reliant on some key staff members, it is vitally important for the business to retain them for as long as possible.
5.Cash Flow Crisis due to Limited Fund
When your company earns thousands of dollars in profit every month, it is easy to assume that you can take a large amount of money out of business without affecting its stability. Even if your business is doing remarkably well and generating more substantial profits, it is essential that you keep the cash in your business bank account to cover expenses such as payroll, rent, production, taxes, and other necessary costs.
This is one of the fundamental causes of the liquidation of the companies. If there is stiff competition for your business, lots of money goes into marketing your product to make it better from the customer’s point of view. And if this fails, you don’t just lose the customer or the market, but you also lose your money. This can cause the management to sell off company stakes, also known as liquidation.
Insolvency, when it happens, is instigated by loss of capital, loss of income and loss of credit. When this happens to a business, it is the duty of the management to take corrective measures else the company will have to shut down. Although many companies are all too well aware of their problems, they fail to deal with the issues correctly.
Business insolvency can occur in degrees of difficulty:
- Receivership- A receivership is when a bank appoints a receiver to sell the assets it has safety over. This happens when a business is said to be salvageable,
- Liquidation- If a company isn’t regarded as salvageable, the company is wound up by either apply for an intentional liquidation or liquidation processes directed by a liquidator appointed either by creditors or a court.
To understand more about company liquidation and how it can help your business, you can take the assistance of the experts at JAXA Chartered Accountants.
We at JAXA Chartered Accountants help business with services like audit and assurance, accounting and bookkeeping, VAT, tax services and much more in the UAE. Contact us today should you need to avail of any of the services mentioned above.