Is My Company Insolvent?

If you’re asking yourself “Is my company insolvent?” then it’s time to give us a call. As the industry experts, we understand that one of the biggest worries company directors and owners face is whether the business they are in charge of is approaching insolvency. While this might be hinted at because they are having trouble meeting debts and paying bills, insolvency is not always as clear cut as that.

As a director, there may be warning signs which you are brushing off too eagerly. Is your bank overdraft always at its limit? Has the bank refused to agree a loan when you asked? Are suppliers not extending their credit terms?

All this could mean you have an insolvency problem. There are two main tests you can do to make sure:

The Cash Flow Test: Should a bill drop through your letterbox today, you should be able to pay it immediately it’s due if you are solvent. If you have a 30-day grace period to pay a creditor and you’re always taking 90, there could be a problem.

The Balance Sheet Test: This is often a more reliable indicator for many companies. What it asks is whether your company assets can cover all your potential liability. In other words, if you closed today, would you be able to pay all you owe?

Many directors will use one test and play it off the other. There isn’t enough cash to pay bills but there are enough assets to cover the liabilities. If you are failing either test, the truth is you need to look at improving your solvency and making sure there’s enough money in the pot for your business to survive the long run. Letting things meander can often lead to bigger problems in the future.

If there is a suggestion of insolvency, you should get advice and guidance as soon as possible. Contacting a licensed insolvency practitioner and discussing matters with your other directors and shareholders can help put a strong plan of action in place.

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