There are a couple key indicators that can notify you that a business or company is insolvent and could need to go into liquidation or if the company needs to be restructured. Recognising whether the company you are employed at is insolvent is essential for ensuring that no insolvent trading penalties are sustained. The following are some key indicators of insolvency:
First of all, a quick definition of solvency: Solvency is fundamentally the competence of a business/company to pay their bills as they are due. On the other hand – Insolvency is an inability to accomplish this.
Key indicators to be aware of:
Incapability to repay debts: Certainly one of the most apparent indicators/signs of insolvency is when a business/company is unable to repay its debt. Businesses and companies have the option to either postpone the payments due, or to refinance the company. If a business continuously has this problem, then something seriously needs to be addressed.
Continuous losses: In the case where a company/business is constantly making losses, it should of warn the directors that the company might become insolvent.
Post-dated cheques: Once a business/company issues a post-dated cheque, they are essentially acknowledging that they have insufficient funds to repay their debts. If these cheques are discredited – it is another sign that there are some serious issues to be addressed.
Outstanding taxes: By withholding tax payments, an insolvent business/company might consider it as the best way to preserve their cash flow. Once this happens – it may be presumed that the company will be insolvent before long, since they can’t repay their debt.
Financial statements: Occasionally, a shortage of financial statement information can conceivably indicate that the business/company is at risk of insolvency. A further sign of trouble is if the financial statements are provided late, with incomplete documentation.
Bad banking relationships: Banks have the aptitude to help a business/company out of hot water. Once banks become unwilling to help and the relationship is strained, it is an imminent sign of insolvency.
As soon as a business/company recognises that it is insolvent, there are a couple of options they can follow – a company restructure or intentional liquidation. Whichever way – it is imperative for all involved parties to be honest with one another so as to evade possible legal implications as a result of the company being insolvent.
The above mentioned are all major indicators of impending insolvency. Some are more important than others, but it’s crucial to be cautious of all of them. I trust you have found our list helpful in understanding some of the key factors of insolvency.
The following article was provided by John Conrad for top South African consolidation loans provider.