INDICATORS OF INSOLVENCY
07 02 2007
INDICATORS OF INSOLVENCY
Insolvency, by definition, is an inability to pay your debts as and when they fall due. In short, it is substantially a cash flow test and thus “CASH IS KING”. A business can therefore be Balance Sheet solvent but technically insolvent. Most people come and seek specialist insolvency advice when it is far too late “and the horse has bolted”. Survival rates of businesses in these circumstances can only be increased if the problems are recognised earlier and the issues addressed immediately.
If problems are allowed to progress, experience suggests that a turnaround is far more unlikely and the results can be devastating for the individual or company, its director’s personally, its employees and its creditors. But what are the indicators of insolvency? There are many indicators that a business may be headed towards the path of insolvency. Some of these include, but are not limited to:
FINANCIAL SIGNS
- unable to pay superannuation on time
- unable to pay GST and other taxes on time
- insurance not in place or assets not fully insured
- no cash forecasts or budgets have been prepared
- continued loss making
- default on loans
- increased borrowing against personal assets (e.g. family home) to fund business
- some creditors outstanding for greater than 90 days
- dishonoured cheques and/or post dated and/or held cheques
- exceeding of credit limits
COMMON SENSE SIGNS
- change of accounting firm
- change of financier
- disorganised internal accounting procedures and controls
- management dispute surfaces in public
- difficulty in obtaining finance or having to use “lenders of last resort”
- suppliers insisting on COD
- statutory demands and other means of legal enforcement
- ATO having issued directors penalty notices
- directors or senior management increasingly uncontactable
- loss of major client
- high employee turnover or loss of key personnel
PRODUCT SIGNS
- increase in obsolete stock
- new competitors enter market
- other firms products seem to be generations ahead
- always seem to be overstocked
- consistent return of faulty products and stock