When a national or global financial crisis hits, most companies fear insolvency. While some companies are always on their feet to check the risks, they are running to face probable insolvency, and others do not care to take action until the last minute of the crisis.
Insolvency is basically the scenario where a company is unable to pay the debt due to the onset of the financial crisis. It is often ignored and not taken seriously until the last minute. The worst-case scenario might include declaring bankruptcy or liquidating the company’s assets in order to repay the money owed to the creditors.
It is important to be aware of the signs of potential insolvency. Some are obvious, but some can go unnoticed. Here are a few warning signs that you should be aware of.
Absence of Information
Often, not having a reliable management department that tracks cash flows, invoices, and records lead to the absence of vital information or incorrect data. This department is also responsible for forecasting all future sales and collaborations. With the lack of such information, it is difficult to predict the existing and future financial statistics, making the company’s stand unclear in the present scenario.
Difficult to Meet Ends
Poor sales and ineffective business can lead to difficulties in paying staff salaries, which is one of the biggest signs of incoming insolvency. You, being the boss, can manage without a salary for a few months, in the hope of getting it cut out from the next successful deal. But with consecutive similar situations, it is high time that you consider dealing with the imminent insolvency.
Constant Nagging from Your Creditors
If it has been a while since you paid your creditors the loan installment, they are certainly going to nag you continuously about paying your dues. If you cannot see yourself paying them any time soon, you need to start taking steps to fundamentally cover this horrific period of insolvency. You might also start getting threatening calls or messages and even warnings of undergoing legal action in extreme cases.
Working Capital Balance
A sure shot way to find whether your company is insolvent or not is to check the working capital balance, in which you calculate your current owned assets and subtract the value from liabilities such as debts and line up with creditors. If the former is lesser than the latter, then the amount will less likely increase sooner, possibly making the situation more difficult to cope with.
Missing Tax Payment
Many companies face this illegal issue of not paying taxes and thus can undergo severe investigation over time. If you do not submit your files and do not pay up to three months, you will be obliged to go under investigation. If you manage to pay the GST and other taxes on time, but explain your situation of not being able to pay on time, you could benefit from paying over longer durations with smaller amounts of money.
Untimely Cash Flows
If you have a lot of deals and customers signed with your company, but do not have payments from most of them on time, it is a sign that your company is financially stagnant. Having to chase your clients to pay up time and again is simply frustrating and disturbs the balance of the company’s cash flow. Make sure to improve your services to get paid on time and attract potential customers, and more importantly, work out your collection process.
Unable to Borrow More Funds
With the already deteriorating situation, the inability to borrow funds from your bank or private creditors is a major sign that your company is being insolvent. Your bank will instantly know the financial situation of your company before you do and hence will not prefer to lend you the funds with the uncertainty of being repaid.
If you have at last realized your company’s potential insolvency, you need to take a few steps in order to solve it. Here is what you can possibly do before it is too late.
Hire Professional Help
If insolvency is a topic which gets you too stressed and leaves you puzzled, you need to take professional help. There are a number of insolvency and bankruptcy advisors and lawyers who can explain to you what should be done, so you can solve the problem easier. The licensed insolvency practitioners at Approved Recovery offer easy liquidation solutions to help recover an almost solvent company. Often, the solution is right in front of you, but you are too stressed to see it. Seeking help can put you on the right way.
Appointing Adequate Employers
As was mentioned above, one of the reasons that potential insolvency never crossed your mind was due to under trained employees who do not keep a proper track of the company’s financial flows. So the first step is to hire an adequate department that can be liable for existing records and future forecasts that allow you to do business properly.
Liquidation of Your Assets
There is a possibility that if you co-own a company and you and your partner own numerous shared assets, you could agree on liquidating some of those assets. It is generally difficult to see partners agreeing upon something together, especially in critical matters like liquidation. But if you do, this step can help in clearing off your debts and start afresh. Your company would start functioning well and there would be room for trying out new ideas and strategies.
With the hiring of the new team, you will need to remodel the cost-cutting strategies for your company. Getting rid of the additional workforce, equipment, cutting-down salaries where appropriate, and planning out operational costs for the future are some examples of cost-cutting and financial planning that you could incorporate to avoid insolvency.
Insolvency is a stage numerous companies may face, and sometimes it happens to a substantial number of companies during a recession or global crisis. Looking at every aspect calmly and working things out can get you out of this problem quite easily, without considering selling all of your assets or your entire company to recover from this situation.