INSOLVENCY IS A SITUATION where business owners or a company is unable to clear debts or pay its employees. It is a very unfortunate time when the income of the company is not enough to cater for its needs. In short, this is a time when the outgoing money (expenses) is higher than the incoming money (revenue).
Insolvency is very common among new companies that have not had time to establish themselves well. This is because when the business starts, there are a number of difficulties that all need taking care of, thus leaving the owners little time to build a financial contingency plan and diversify their finances in order to prepare for financial hardships or adjustments in one facet of the business or another. In the current economy, insolvency is one of the main reasons why many businesses are collapsing. The first few years of business are challenging and unless the owners have extra income or diversified finances, the business will likely crumble at the first sign of trouble or hardship.
Owning more than one new business is another reason that can fuel insolvency. You will be straining your cash enough with one new venture; to be trying to build and manage more than one new business is almost impossible. You almost need two grounded businesses in order to ensure the success of the new one, as well as maintain the other two. Basically, there are two forms of insolvency. The first one is the cash flow insolvency. This form of insolvency comes when the business lacks any form of cash. It’s a situation where the company only has assets under its control but no payable cash. It becomes difficult to pay employees and debts because there is no liquid cash. In such a situation, cash flow becomes stagnant.
Balance sheet insolvency is another form of insolvency. It occurs when the business has negative assets. It is a situation where the expenses override the business assets. In most situations, a business will suffer from either of the insolvencies. If by chance a business finds itself in both insolvencies, chances of survival are very little, especially if the business depends on employee action. If only one form of insolvency is present, there is a potential of surviving, depending on the management skills of the owners.
When a business faces insolvency, there are a number of procedures that need to be accomplished. Liquidation of assets is one of the survival procedures that should be taken into consideration. It is a process that involves converting any remaining assets into cash so that any debts owed are cleared and employees are paid (if the operation of the business depends on them). There is no need of keeping assets that will, when the dust settles, be auctioned at throw-away prices. You better sell them and clear the debts, at least making an attempt at survival.
Another alternative to remedy insolvency is that of outside administration (consulting). Before opting for this procedure, the company should do some analysis to know whether there are real chances of surviving in future. If, indeed, there are chances, then outside administration is the best alternative. It is a process that will keep the business running under an administrator who will be providing support and financial guidance. The administrator will be responsible to explore any possible ways of getting finances. If it fails, the business will be dissolved. However, with a good outside administrator, the business has a fighting chance of getting back on its feet and up to normal operational levels.