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What is insolvency?
Insolvency is the state of being insolvent or unable to pay your debts as and when they are due and payable. If you’re facing it, it’s a daunting reality.
Warning signs of insolvency
- Continued losses over recurring financial reporting periods
- Inability to borrow money or obtain loan approvals
- Overdue taxes
- Poor liquidity ratios
- Inability to produce timely and accurate information on your company’s performance and financial position
- Dishonoured and post-dated cheques
- Special arrangements with certain creditors
- Sales of non-current assets (e.g., land, vehicles or equipment) to fund working capital deficiencies
- Inability to meet employee payment obligations (e.g., superannuation payments)
- Replacing standing creditor payment terms with discretionary decisions on when and which creditors will be paid
- Absence of any budget or basic financial plan/goals (e.g., seasonal periods may cause reductions in service hours/ revenue and need to be planned for operationally to reduce expenses to prevent hours being spent on post-analysis of suspected revenue loss)
It’s important to note the difference between a temporary lack of liquidity (you may still be solvent) and an endemic shortage of working capital. To figure out which applies to your company, you can use a balance sheet test.
What is a cash flow test?
A cash flow test looks at whether your company can pay its liabilities, as and when they fall due.
What is a balance sheet test?
A balance sheet test involves looking at your balance sheet to work out whether your company would have more assets or liabilities if it were immediately wound up.
If your business is facing any of the above, you should take immediate action to turn things around.
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