Insolvency is the inability of a business to discharge all of its debts in full as they are due for payment.
It is a critical condition that company directors must ensure does not occur if the business is to survive and operate legally. Company directors must ensure that the business does not trade while insolvent. They will be held liable for insolvent trading and civil or criminal penalties may apply. If your business is experiencing cash flow problems and you suspect your company is approaching insolvency, it is critical you take immediate action and seek professional financial assistance.
In this 1st part of 2 articles, we discuss the early warning signs that your business is at risk of insolvency. If you are experiencing any of these situations in your business, get professional turnaround advice and solutions as soon as possible. Do not sit and wait for things to improve because the situation will not be resolved on its own.
You are unable to pay your taxes.
A business experiencing financial distress will often forego tax payments to ensure that they have enough cash to pay employee wages and urgent creditor and supplier demands. While this may seem like an effective way to utilise cash reserves, foregoing payments to the tax office will add penalties and interest to your tax liabilities. Before you know it, you will have incurred a large amount of debt to the ATO which you may have a more difficult time to pay off.
You are using funds for employee superannuation contributions to continue trading.
Superannuation contributions are remitted quarterly and should be paid within the month after each quarter. If the funds are not remitted in the required time, these amounts will be considered as debt under the Superannuation Guarantee Act. This debt due will also be subject to penalties and interest.
You are experiencing ongoing losses and poor cash flow.
Businesses with continuing losses should consider selling idle or non-performing assets to help generate some income for the company. Also, try to determine how you can reduce overhead and employee costs as this may help reduce company spending.
You are unable to pay creditors on set terms e.g. 30-60 days and suppliers start demanding cash on delivery (COD).
When you are unable to pay creditors or suppliers on the agreed terms, then they may start demanding cash upon delivery of the supplies to make sure that they get paid. Your inability to obtain credit from suppliers will have an impact on your already unstable cash flow. You may also experience complaints or queries from your suppliers and they may place transactions with you on ‘special arrangements’.
You are receiving demands and legal notices from creditors.
When creditors start sending final notices and legal demands or issuing judgements and warrants against your business, it may only be a matter of time before winding up proceedings begin.
Some final words
If your business is at risk of insolvency, there are options company directors can choose from to save the company. Their options may include refinancing, restructuring the business or appointing an external administrator. Another means to save your business is to seek the help of a professional and certified turnaround specialist as they can help you negotiate with the ATO and other creditors. They can also provide you with business recovery solutions that may lead to a successful turnaround for your company.
Read the 2nd part of this article, 10 signs that your business is facing insolvency - part 2, to learn more about the additional 5 signs that your business is facing insolvency.