How To Spot If Your Business Is Insolvent?

How can you tell if your business is heading for insolvency? On the face of it, you’d think business insolvency was a straightforward issue to diagnose. But the fact is that many businesses that appear to be sound are actually insolvent.

One way to look at it is that a business becomes insolvent when it goes beyond the point of ever being able to meet all its liabilities when they are due, or to pay all its creditors in full.

Of course, every situation is different. But in general, there are three ways to identify business insolvency – in terms of 1) cashflow, 2) the company balance sheet and 3) legal action.

Cashflow – can you pay your debts when they are due?

For example, if your suppliers’ terms are 30 days, can you pay them within that time? Or do you regularly need longer? And if you have employees, can you pay their NI and Tax deductions to the Inland Revenue by the 19th of the month following the month they were deducted? Or is your liability for PAYE and VAT building up?

If you are regularly unable to pay your debts when they are due, your business may be insolvent.

Balance sheet – does your business owe more than it owns?

Do your business liabilities add up to more than your business assets? And if not, are you sure that your accounts provide an accurate picture of the business finances? Often, a solvent balance sheet includes items that have been overvalued, such as redundant stock and debts that can never be collected. If you deduct these items, does the balance sheet still look healthy?

If your business has insufficient assets to cover its liabilities, it is insolvent.

Legal action – are your creditors taking you to Court?

If a creditor has obtained a County Court Judgment against the business (ie, a legal decision from the Court stating that the business owes the creditor money), and it remains unpaid, the Court might investigate your finances to determine whether the business is insolvent. The creditor might try to recover their money through the bailiffs, or they might petition the Court to start business bankruptcy proceedings. Any creditor who is owed more than £750 by your business may petition the Court to order your business into liquidation if you fail to settle the debt within 21 days.

If you are in any of these situations, it is likely that your business is insolvent.

What should you do about it?

If you believe that your business is insolvent by any of the above definitions, it’s vital that you act as quickly as possible – because as soon as you know your business is insolvent, or heading that way, your responsibility shifts from looking after the interests of the business to looking after the interests of your creditors. As a director, you have a duty to reduce their losses.

If you weren’t aware of this, you’re not alone. Unless they have previous experience of this situation, many directors are not aware of their legal obligations in business insolvency. And yet the consequences of misconduct can range from disqualification as a director to being held personally liable for the business’ debts, and even imprisonment.

If you are new to business insolvency, it makes sound business sense to seek professional guidance through the process. An expert will be able to give you the facts about your duties and obligations as a director and advise you whether, in your case, business turnaround is a viable option.

At Touch Financial, we have specialist experience in matching struggling businesses with the experts who can offer the most relevant assistance. It won’t cost you anything to talk to a member of our team, who will assess your needs and introduce you to the lender, SME business administration service, or insolvency practitioner who is the best fit for you.

What should you do if your company is insolvent? Contact one of our expert advisers now to discuss your options.

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