Business Insolvency: How To Spot Early Signs And How To Avoid It

Being a company director can be tough. You have to attend the never-ending board meetings, take business trips abroad, and work hard towards the overall success of your business.

It’s because of such requirements that directors can miss out on a very fundamental factor of the company – solvency. A business can be considered solvent when the value of its assets exceeds its current liabilities/outstanding debts. 

When you notice problems arising with your overall cash flow, one reason can be accredited to underperforming employees. However, when it happens frequently, there is a need to take a broader scope of the business’ financial position before things get out of hand.

Poor management can contribute to business insolvency

Once upon a time, hiring a manager or director involved looking at their reputation in the industry. This can blind businesses, as it involves going on word of mouth and not accreditation. In this modern-day society, things have changed; after your CV is looked at, you may have an interview, test or have 

to complete a task. Still, when people are hired on reputation alone, this creates room for problems which can lead to insolvency. 

There are systems laid in every business to provide information in a hierarchical order. These involve reporting flow forecasts, sales, revenues, bank reconciliations, and bad debts.

When a business’ finances are not organized properly, it can be hard to determine how much is owed and how much debt is out. It’s an incredibly risky situation for the business to be in, and if its debts aren’t accredited then its fall is imminent.

Use key performance indicators (KPI) for business insolvency

KPIs are a vital metric used to determine the performance of a business. It’s what reputable Insolvency Practitioners like Hudson Weir use when providing advice.

The graph below is an example of KPI. It shows a KPI of Amazon’s transportation cost. You can see the comparison between shipping and fulfilment costs.

From the graph, Amazon’s management can track the performance of the business and mark the places that need a few tweaks to improve customer service and increase their revenue.

From a solvency scope, you won’t need KPI’s that show the cost of logistics. You need data that best represents your company’s debt to equity ratio and the net profit margin. 

Without a KPI in place, you are in the dark and can’t determine your company’s current financial status.

If you are unable to pay employees

The last sign that you’ve already entered the insolvency stage is when you struggle to pay your employees.

When you begin to pay them four to eight days late, you need to take action and seek an urgent financial boost. It could be a question of time before your business is declared insolvent.

What makes the situation more difficult to handle is that the workforce may not understand the situation. Their enthusiasm could be lost, which could lead to low output and further affect the company.

Conclusion

Insolvency is one of the most challenging business hardships to tackle. Every company is different and there are lots of moving parts involved, so a clear cut path to avoid insolvency doesn’t exist.  So, make sure you fight for your business’ survival with support from financial experts.

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