The following is a list of the top causes of business insolvency, but in order for you to really understand these causes, first we need an understanding of what business insolvency means.
When a business is said to be insolvent, it means that it no longer has the capacity to repay its debts to its creditors in due time.
Business insolvency can result in receivership (a receiver is appointed by a courts to act as a temporary director of an insolvent company to try rescue it from its debts), liquidation (the only option left if the company has no way to pay its debts but to liquidate itself), or total bankruptcy.
There can be varying reasons why companies become insolvent. And these reasons could either revolve around internal or external issues. Internal issues are is usually far easier to resolve, as they are within the company’s control. External factors, unfortunately, are usually out of the control of the company.
The two top causes of business insolvency are as follows: lack of capital or funds to keep the business operating and poor financial management. Now let us examine each major factor.
Lack of capital or funds to keep the business operating
When a company doesn’t have a clear business plan with well-defined capital management, this can cause major issues. It is important to have a skilled, focused financial director in the company. They are responsible for ensuring the company is on course realise a good profit to sustain its operations.
Poor financial management
This factor is directly related to the first one above. This includes initiating a planned approach to spending and borrowing throughout the entire company, and ensuring checks are in place to ensure the company stays on course, and within budget in every department. When targets are not met, adjustments must be swiftly made to keep the company in line. In essence, your business requires a clear business plan and good cash flow management.
However, the causes of business insolvency are not only limited to these internal issues. There are also external factors that can adversely impact the business. Customers, business competitors, and constraints laid down by the government are only some of the external factors that are beyond the company’s immediate control.
It’s a sad fact that less than 50% of small businesses don’t survive for more than three years from the date of their foundation. So it is vital to take into consideration these most common causes of business insolvency to give your company a clear advantage.