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.
A pre pack administration is rising in popularity as one of the most effective business recovery options there are. It is considered as a huge savior by many troubled companies and to find out the reason behind that, you better read on.
The Business Recovery Professionals in the UK defines pre packs as arrangements under which the trade of the entire or a fraction of a business or its assets is negotiated with a purchase preceding the appointment of an administrator who in turn will effect the sale straight away or shortly after his or her appointment.
A pre pack administration is a restructuring method that allows troubled businesses, entities that are likely to be under insolvency and those at a high risk of dissolution and/or bankruptcy to sell part of or the entire company to a buyer, oftentimes to one of its directors, to a trade buyer or to a third party, where it will then operate under new management and under a new name. In some arrangements, a buy back will be included in the contract.
Its use has been popular for troubled companies due to a number of factors. Listed below are a few of the many.
It promotes business continuity as it strengthens the entity’s going concern. Entities at high risk of insolvency and bankruptcy often turn to immediate liquidations. There’s nothing wrong with that except if you don’t want to give up your hard work just yet. A pre pack allows operations to continue and the company to recover.
It helps save employment. The restructuring may call for a few layoffs particularly that of redundant positions. This is still good considering that in liquidations, everyone loses their income sources.
It retains brand image. Continuation of business says a lot for a troubled company. It means that you are still fighting through, finding means to recover and doing your best to make ends meet. Once your company has been dubbed as bankrupt, there is no more going back.
It invigorates trust and confidence among each member of the organization. Employers saving jobs, directors finding solutions to problems and employees participating in every way they could boosts morale within the organization. Manpower has a lot to do with the success of every company.
It also helps preserve creditor relationship and standing. A pre pack administration provides a bigger return to creditors than that achieved by liquidations. Truth be told, creditors will prefer the company to continue and pick up so that it can pay them in full than close down and pay them partially with the balance written off.
If you are having problems with your company, it’s best to consult with insolvency practitioners like AABRS.com.