It is not uncommon for a business to take on debt. There are a number of scenarios in which taking on new debt, on either a short or long-term basis, can ultimately be advantageous for a business. But it is important that business leaders keep an eye on their debts and obligations and ensure that the business remains solvent.
From the outside, it is easy to find yourself wondering how your fellow entrepreneurs could have allowed their debts to spiral to the point of insolvency. However, the reality is that insolvency often sneaks up on a business. Part of the reason for this is that debt has become so normalised in our society that we often simply accept it as a fact of both our personal and business lives.
When Does A Business Become Insolvent?
There are two definitions of insolvency. First, it refers to a business or individual whose liabilities, the amount of money that you owe, exceeds the value of your assets. Alternatively, it can apply to an individual or business who finds themselves unable to pay their debts as and when they are due. This is why it is so important that businesses stay on top of their debt situation. Complacency and inattentiveness can sink a business.
There are certain warning signs that can indicate insolvency is imminent or at least creeping up on you. You should always remain vigilant and keep checking for the danger signs. As long as you make an effort to keep your debts under control and your finances organised, you can avoid the creeping threat of insolvency.
Issues Paying Creditors
This should always be a big red flag for any business. An inability to keep up with your payments to creditors is a sure sign that you are having issues with cash flow. As your cash flow decreases, the amount of debt you can sustain while remaining solvent will also decrease. If you aren’t paying your debts off, this means that you will be inching ever further towards insolvent.
If you are having trouble paying your creditors, this is a pretty good indication that it’s time to rethink your overall strategy and operational procedures. Whatever it might take, you need to find a way to keep paying your creditors and stay as far away from insolvency as possible.
Taking on Debt at an Unsustainable Rate
Many businesses take on debt at a near-constant rate for much or most of their existence. However, while taking on a reasonable level of debt is often useful and necessary for a business, if a business begins to take on too much debt in a relatively short space of time, they are much more likely to end up facing insolvency.
The easiest way of avoiding any issues with excessive debt is to simply stay on top of the situation and ensure that you continue to monitor new debt as you take it on, as well as the rate at which you are able to clear your existing debts. If you find that remaining on top of your business and or personal debts is becoming too difficult, this is a sure indication that you need to bring on the services of an accountant.
Whenever possible, businesses of all sizes should be looking to set aside some of their profits as savings. These savings will provide the business with a financial cushion should it find itself facing difficulties. The health of these savings can be a strong indication of the health of the business overall. If the rate at which these savings grow is decreasing, this indicates that your profit margins are also shrinking. If the size of your savings buffer is shrinking, this indicates that your profit margins have gone into the negative.
Again, so long as you are keeping an eye on your savings, you should be able to react promptly and efficiently to any reductions in your income stream. A thorough and detailed accounting of your business as a whole, as well as your workflow and operational procedures, is the best way of pinpointing the ultimate cause of your reduced cash flow.
A Lack of Diversity
Maintaining a diverse workforce at all levels of your business is advantageous for a number of reasons. The more diversity you have, the wider the range of ideas and viewpoints you have at your disposal. Recognising a more diverse range of talent also serves as an excellent morale booster for your other workers, this translates into better work overall and greater chances of profit. In this report from Company Rescue, it’s suggested that small and medium enterprises which are run by women are less likely to face insolvency. A lack of diversity at any level of a business is cause for concern as far as that business’ long-term viability is concerned.
You need to constantly be on the lookout for any indication that your business is inching closer to insolvency. As these warning signs appear on your radar, act promptly and decisively to head off the danger.