Why do businesses become insolvent?

By Mr Bankruptcy

29th August 2019

When a business is in financial difficulty the transition into insolvency can sometimes be swift. As a business owner, you need to be aware of the early signs to look out for that could indicate that your business is at risk of becoming insolvent.

What is insolvency?

A business becomes insolvent when it can no longer pay its debts when they are due or it has more liabilities than assets.

When a business finds itself in this situation there are several options available to it that can either allow the company directors to try and rectify and take control of the financial situation or to provide time while plans to sell the business are made.

What can cause a company to become insolvent?

There can be several changes that can seriously impact on the financial situation of a business and potentially lead to insolvency:

  • Cash Flow: If you regularly don’t have the cash to cover your day to day operating expenses
  • Increased competition: New competitors are attracting your clients or making it harder for you to attract new business
  • Loss of a major customer: An important customer that provides substantial income will have a dramatic effect on your business if lost
  • Large debts: When they continue over a long period of time the impact of these debts is compounded as more money must be repaid
  • Lack of stable sales: Makes it hard to manage cash flow or to invest
  • Key staff leaving: If they hold particular knowledge or skills, their departure can have a substantial impact on business operations. Team morale can also be affected when an integral member departs
  • Excessive borrowing: This becomes challenging if you begin to experience low sales, leaving the business exposed.

Signs that a business is in distress

Being aware of some of the causes of debt can help you look for signs that the business may be in trouble. The Institute of Chartered Accountants in England and Wales (ICEAW) suggest the following can be signs that a business is in distress:

  • Spending is greater than earning on an ongoing basis
  • Higher interest payments as lenders view you as a risk
  • Frequent defaulting on bills
  • A rise in debtor or creditor days; the former leads to suppliers ending vital supplies while the latter situation, failing to chase debts, impacts on cash flow
  • Falling margins as high cost and low income become unsustainable
  • Staff unhappiness can be an indicator that something is going wrong, especially at senior levels.

If you think your business is in this situation it’s important to take prompt action. Seeking advice quickly can help prevent the situation getting worse and allow you to determine the best approach to move forward. 

James Rosa Associates

James Rosa associates is a firm of debt advisors and debt adjustors. Taking a supportive and friendly approach, we offer a full range of advice and professional services to individuals and business owners/directors facing unmanageable debt or involved in civil or commercial disputes.

Our services include:

  • Insolvency support
  • Negotiated settlements
  • Personal assisted bankruptcy
  • Mediation

We are authorised and regulated by the Financial Conduct Authority (FRN665061) to work with clients to produce bespoke solutions to fit their specific circumstances.

Find out if you qualify for a free consultation

If you want to deal with an unmanageable debt, or bring a dispute to a swift and cost-effective resolution, contact James Rosa Associates, ring 0845 6807217 or email enquiries@jamesrosa.co.uk to find out whether you qualify for a free consultation.

Please be advised that all views expressed in these posts are those of the author and not of James Rosa Associates ltd.