How to identify insolvency risk

For small business owners the risk of insolvency is never too far away, but it doesn’t mean that actions can’t be taken to save a business.

Even a profitable business could still face insolvency which makes it vital to be aware of the warning signs.

A business can struggle to cope should its main customer disappear, if it faces unexpected expenses or if invoices are paid late – such occurrences are more common than you may think which is why the risk of insolvency can hang over many small firms.

Given that a business owner could be faced with personal liability for a share of the company’s debt in the instance of insolvency, it’s key to act early.

Seeking expert advice on restructuring a business is recommended, as it increases the likelihood of finding the best outcomes for stakeholders.

One early warning sign of insolvency comes when a business is struggling to pay its staff and if directors are forced to forgo their wages then the company already needs assistance.

If a company is unable to source funding or credit from the many alternative finance options that are available then it’s important to assess the business and its operations.

An options review can highlight potential solutions or courses of action, as a lack of finance can mean that essential payments are missed and that legal action may be forthcoming.

Management also has a huge impact on the business overall and issues among board members, directors or senior staff can all point to issues that need to be studied.

It is not uncommon for struggling businesses to report that issues prevent them from running effectively and if not dealt with, these problems can have a detrimental effect on a firm.

Cash flow difficulties are another major sign of insolvency risk, as late payments from suppliers can make it difficult for a business to meet their own outlays such as tax liabilities, rent or expenses.

If a business is experiencing trouble with its tax requirements, HMRC time to pay services can help to ensure payments are made when needed.

The main point to remember if a business is facing difficulty is to seek assistance at the earliest possible opportunity.

By Phil Smith


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