Recovering from business insolvency can be a difficult task. Most businesses can suffer from insolvency at some point in their businesses’ lifetime and it can be a true test of a business to steer through this difficult time by making the correct decisions. But before we dive into the topic of recovery from insolvency, you need to have an understanding of what insolvency is, and what it means for your business.
Insolvency is simply defined as a business or an individual’s inability to pay their debts to their creditors when the debts fall due. This is a clear sign that the business isn’t doing what it’s supposed to: make profits. When there is insolvency, money is being lost. When there is loss of money, your business is in trouble.
While insolvency doesn’t necessarily always lead to business liquidation, it certainly could be the outcome. If your business is just starting out, it may not be a surprise to find that your net assets are less than your liabilities.
Business insolvency is an indication that your business plans and operational models are not working as planned. There are many causes of insolvency. Some of the most common reasons of business insolvency are – poor capital management and lack of capital.
Poor Capital Management
When the business doesn’t closely keep track of its capital, income, expenses and debts, it is most likely that business errors of judgment can occur. Financial managers need to be very knowledgeable and up-to-date on the cash flow and accounting of the business, because not knowing where the business is financially at any given time can lead to trouble.
However, just because there is a financial manager in place in a business, it does not absolve the responsibility of the directors to know the financial situation of the business. Sufficient start-up capital is important too, because an insufficient amount of start-up capital can, and often does result in insolvency very early on in the life of the business.
Business turnaround or recovery is often the main goal of an insolvency consultant. Instead of liquidating your business, laws now support helping your business to recover from insolvency, if that is at all possible. Proper planning right from the start to ensure you have the right amount of capital AND proper management of that capital should help you have a balance sheet that shows profits instead of insolvency.
A declaration of bankruptcy or liquidation is the last thing any business would want for itself, But it is sometimes unavoidable. However, these are definitely not your only options. Businesses do restructure and survive. In fact, some of the most successful big name business success stories have had close calls of this nature in their business past. Recovery is not easy, but determination clarity and a good advisor are crucial to enable you and your business to recover from business insolvency.