We all want our company to always be in good financial health.
But sometimes due to poor financial planning, too much borrowing, cash flow problems & even bad management can land your company in financial distress thereby causing insolvency.
So, in order to be afloat & have good financial health it becomes imperative for you to know what could be the major causes of insolvency in a company.
We, at LMS, are specialised & licensed in Insolvency Practice.
We can provide you with guidance & information on various causes of insolvency and available options for your business in case your business faces insolvency issues.
Today we will discuss some important causes of Company insolvency so that it can help you to avoid financial distress & insolvency.
1. Cash – Flow
One of the major causes that can cause your business to go through insolvency is poor cash flow into the business. It is possible that the business cashflow fluctuates during the year. But if your cashflow is so low that you are unable to meet your creditors' due dates and are unable to pay them, it can land your business into insolvency.
2. Financial Management
It is very important that the financial decisions are taken after careful research & analysis. It is important to forecast if the decisions would involve a major cash crunch. If so, then you will need to make provisions or reserve for cash flow in order to be able to pay off your debts & not undergo insolvency.
3. Mismanagement of company funds
It is important that the company funds are well maintained & not used for any personal expenses. Too much capital borrowing or drawing by Directors can also cause insolvency problems. If the Directors have withdrawn any amounts from the company funds for any kind of personal usage, they are liable to repay them back to the company.
4. Planning & Budgeting
A company needs to make profits in order to be able to sustain its business. Therefore, proper planning & budgeting needs to be done for various expenses & overheads. Business has to think about giving up on expenses which are unnecessary. Try to minimise the expenses to be able to steer clear of insolvency.
5. Repayment Demands
Over borrowing can cause a lot of distress to the financial stability of the business. It is crucial that the repayment of debts is made in time. If your company owes money and begins missing payments on the debts, you could be served a statutory demand for payment. This is a legal demand that forces you to make the payment or you risk being forcibly liquidated.
6. Over reliance on a customer
For a good business it is always important that they have diverse clients. So, if any client stops being your customer, it will not hurt the business drastically. But if your company relies on one key customer & that customer decides to leave your company then you will have to take a major financial hit which can sometimes even lead to insolvency.
7. Change with Times
With changing times, circumstances change & so do the market. More competitors are coming into the market who might be using better technology & new innovations. You should be able to cope & change to the new ways of business in order to sustain yourself in the market & not lose out to the competitors. So be aware of your competition in the market & the changing ways of the market.
8. Loss of Competent and Skilled Employee/s
One might think what has the loss of employees got to do with Insolvency. Staff keep changing in organisations. So why would I mention this point as a cause for Insolvency? Well, we are not discussing each and every member of staff here that moves out of the company. We are talking about a competent, skilled employee who is an asset to the company & whose loss to the company will bring the company down.
It is therefore very important that such staff is retained & proper care is taken to ensure that they don’t leave your organisation.
9. Top Leadership failures
It is important that the companies are not only well organised, but also well run. Top management should show leadership skills benefiting the company & take decisions that help the company grow & not burden the company with major debts that can lead to insolvency or bankruptcy.
10. Political & Economic changes
Now, the political & economic changes in the country is something that is beyond the control of the company. There may be a change in the political leadership in the country which can bring in laws which can adversely affect your business.
The economic changes that are happening today throughout the world are also something beyond the company’s control, but may adversely affect the growth of the company.
Sometimes these changes can be so bad for the business that it can shut your company down, forcing you into debt & insolvency
So, as discussed above these are some major causes of Insolvency in a company. There are ways to get out of this mess.
If your company is suffering from Insolvency, Bankruptcy or Liquidation you can get in touch with us at LMS
Feel free to call us for no obligation initial advice on 0161 864 3824 or e-mail: info@landamsltd.com
Alternatively, you can use our Contact Us Form to get in touch with us.