How to Prevent Business Debts Leading to Insolvency

One of the risks of running a business is the possibility of getting into financial trouble. You could find yourself in a situation where money is going out faster than it’s coming in and you’re unable to pay your bills on time. Debts, in particular, can lead to insolvency as interest payments mount and due dates pass by with instalments unpaid. 

In this article, we’re going to take a look at what insolvency really means and what you can do to prevent business debts from putting your solvency at risk. 

What Does Insolvency Mean? 

It’s important to note that insolvency does not mean bankruptcy. A company can become insolvent even if it is profitable. 

Insolvency is related to your ability to meet your current financial obligations. While you might have a healthy account receivable, it may not be enough if you don’t have sufficient cash on hand to pay your debts. 

The formal accounting definition of insolvency applies when a company experiences either of these two situations: 

  • An inability to pay bills when they come due
  • When the liabilities of a company exceed the assets of the company

In both of these cases, companies can find themselves in situations where they’re unable to meet their debt payments. While a business might be profitable long-term, an inability to pay its obligations could force it to shut down its operations. So, what seems like a small problem can become a full-blown crisis if you can’t find additional finance.

What Do Insolvency Specialists Do? 

Insolvency Practitioners aren’t simply people who go in and liquidate the assets of a failed business. Instead, you could think of them as consultants with the knowledge and skills to turn a business around. 

Many insolvency specialists have many years of experience helping private sector companies deal with their debt obligations. They can implement strategies to help failing companies climb their way out of debt problems and get back on a firm financial footing. Most businesses have the potential to succeed when they enter insolvency, but usually only if they seek the help of qualified insolvency professionals. 

So, what do insolvency specialists actually do to help companies prevent business debts leading to insolvency? 

Top of the agenda is improving cash flow. Companies need a continual supply of cash on hand to pay their workers and meet their debt obligations. If they don’t, they can run into serious trouble and the business can fail. 

Often the solutions are more straightforward than you might think. Insolvency Practitioners, for instance, can help you create better invoices to get paid faster or show you how to reduce your current holding of the stock. 

Professional insolvency experts can also help you implement a cash-flow forecast – something that shows you how much money you’ll have on hand at any given time of the year. This estimate gives you advanced warning of when you might face a cash crunch, so you can take steps to prepare for it. 

Specialists also help to tackle insolvency problems from the expenses side of the business by addressing costs. While poor cash flow is a problem, business expenses, such as the cost of debt, can be a substantial burden in their own right. High costs eat into the capacity of your firm to make a profit and can cut your cash holdings. 

So how can you prevent bad debts from leading to insolvency on the cost side of the equation? First, you can find ways to pay off debts earlier, to reduce your interest burden. Interest payments can eat into your available cash and make your company less competitive. 

Another thing you can do is look for ways to work more efficiently. That could mean embracing automation, cutting back on staff or outsourcing work to third-party agencies. 

When To Contact An Insolvency Specialist

How do you know when you need to contact an insolvency specialist? 

Business owners usually contact Insolvency Practitioners when it becomes clear that they are unable to cover their debts. Typically, owners know a few months in advance that there are problems with their cash position and that they need to take action to resolve the situation. 

Companies also contact insolvency specialists in situations such as receiving a statutory demand, when they can’t pay wages or if they lack working capital. 

The best way out of an insolvency crisis is to seek professional guidance. Insolvency specialists can show you your options and help you get your business back on its feet. Remember, insolvency can be temporary and there may be solutions – it doesn’t necessarily mean the end of your company. 

Adam Hansen

Adam is a part time journalist, entrepreneur, investor and father.