Insolvency is a critical condition that company directors must ensure does not occur if the business is to survive and operate legally.

Insolvency is the inability of a business to discharge all of its debts in full as they are due for payment. Company directors have the responsibility to ensure that the business does not trade while insolvent. They will be held liable for insolvent trading and civil or criminal penalties may apply.

In this 2nd part of 2 articles, we continue to discuss the early warning signs that your business is at risk of insolvency. If you are experiencing any of these situations in your business and you suspect your company is approaching insolvency, it is critical you take immediate action and seek professional financial assistance.

  1. You are making inadequate sales and lack sales forecast.

    If your sales fall below your target or quota, then you will not have the revenue to pay off your debts and liabilities. Also, you cannot just rely on your hope that the ‘next big’ sale or contract will save your company. You need to have reliable sales projection and consistent sales to help settle payments your business needs to make.
  2. You have a high number of accounts receivable.

    If you are having a difficult time collecting loans or credit issued to clients or debtors, then you may have to introduce a more effective collection process. Perhaps you may need to delegate an individual to follow up with clients and debtors and collect the amounts they owe. The delegated individual can also keep a record of the total amount of the receivables and their credit terms so that they can keep the collection process on track.
  3. You have problems obtaining finance and rely excessively on related parties for loans.

    A business that is unable to secure credit or loans for critical financial needs or is unable to raise funds from shareholders may then turn to family members or related parties to borrow funds. In the event that the business winds up, funds secured from these individuals will be considered as unsecured loans.
  4. Your business has incomplete financial records and you have unorganised internal accounting procedures.

    If you are unable to keep track of your financial records or have unorganised accounting procedures in place, then you will be unable to pinpoint the root of your financial troubles and will have a more difficult time addressing it. It is crucial to have complete financial records as these can give you a proper description of your transactions and financial position. It will help to consult or employ accounting professionals as they can help organise your financial records and give you proper accounting advice.
  5. You are unable to sell stock or you have a low stock turnover.

    If the company’s stock is not moving or if a large number of stocks is extremely old, the value of this asset recorded on the balance sheet will be affected and after an adjustment to the value, you may find your business in a negative balance sheet position.

Some final words

If you sense that your business is in trouble, it is crucial to act straight away. The earlier you get help, the better are the chances that a successful turnaround can be made for your business. It would be best to partner with a professional and certified turnaround specialist as they can help you negotiate with the ATO and other creditors. They also can assist you in managing your cash flow and can give you the appropriate financing and management support you need.

Read the 1st part of this article, 10 signs that your business is facing insolvency - part 1, to learn more about the additional 5 signs that your business is facing insolvency.