Insolvency is described as the state by which an individual or entity can no longer meet their obligations as they become due. It is where one’s total liabilities has exceeded the total amount of assets thereby disabling the ability to pay off debts due to the lack of adequate resources. Turning insolvent is dreaded by many and for obvious reasons. It is one of if not the major cause of bankruptcies and liquidations. Today, we asked experts for the ways by which we can check and warn ourselves of a looming insolvency.
- Dwindling Cash Flows
When cash outflows exceed inflows, insolvency is pretty much present. Even before such occurrence happens, the frequency by which the entity’s cash levels tend to dwindle and fluctuate is a sign of inconsistency and instability which are red flags on their own.
- Increasing Interest Expenses
Why do interest expenses rise? It goes up when debts are left unpaid or when payment for them is delayed. Why would there be delayed and missed payments? For obvious reasons, there has to be some sort of financial trouble. There is no valid reason for any individual or business to miss their obligations intentionally.
- Winding Up Threats
Missed obligations are the only reason as to why creditors will bring in winding up petitions and threats. Keep in mind that such action is costly on their part and is thus their last resource at forcing a collection. Also, winding up petitions are only applicable to insolvent entities. This of course is a major concern as such act can force the entity to liquidate even without its consent making it a compulsory procedure.
- Top Management Resignations and Turnovers
When a ship is about to sink, who are the first to know? The crew and the captain of course. In the business setting, this pertains to the top management officers and board of directors. When one sees a lot of high ranking officials leaving the organization, this should be taken as a red flag. These individuals could be saving themselves and their source of income just in time before the company has fully sunken deep. Take notice.
- Large and Abrupt Cost Cuts
Reducing costs is not new to businesses and even us individuals. However, when these cuts are both large and abrupt, it could mean that the entity is in dire need of extra funds or lacks adequate resources for them. In the business setting, the first to go are oftentimes expenses related to employee perks and benefits.