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Insolvency is a state in which a business is unable to pay debts as they fall due, has liabilities outweighing its assets and or has negative net assets. If a business is found to be, even unknowingly, trading whilst insolvent, company directors can face serious consequences – including the potential to be held personally liable. Therefore, it is essential to be aware of the warning signs of insolvency, so you can take action as soon as possible.

Signs of insolvency

1. Consistently Paying Late

If you find yourself constantly receiving letters, emails and phone-calls from creditors chasing payment, there is a possibility that you are heading towards insolvency. In serious circumstances, late payment can result in legal action being taken in the way of statutory demands, garnishee notices or even wind-up petitions. If your business is receiving any of these notices, it is imperative that you take action immediately (we can help!).

2. Failing To Meet Tax Obligations

While all debts are important, most businesses prioritise payments to the Australian Tax Office (ATO) as soon as they are due; therefore, if your business is failing to make these payments, it is a strong indicator that your business is facing insolvency. This is particularly the case if you are already on a payment plan and are not adhering to the agreement, as it is indicative that your financial situation has likely deteriorated.

3. You’re Consistently Making A Loss

All businesses experience high and low periods and it is completely normal to not always make a profit. However, if you are consistently making a loss it may mean your business has serious underlying financial issues which, if left unresolved, could lead to insolvency.

4. You Have Maxed-Out Your Borrowing Power

If your bank has reduced your credit limit or declined a loan application, this is another insolvency warning sign. Banks run thorough financial checks when reviewing a loan application, meaning they have the potential to spot financial trouble before you do. Therefore, it is important to investigate all borrowing caps and loan refusals so that action can be taken to restore your business’s financial state.

5. Poor Financial Records

Businesses that have unclear, incomplete or even non-existent financial records are at high risk of insolvency. Although it does not mean you are insolvent already, it can be a contributing factor to causing insolvency. Without adequate records, business owners and directors have no way of being aware and up-to-date with the company’s financial position. As a result, if the business does start struggling, it’s highly likely that the action required to save the business will not be taken.

Why Not Take Action Sooner?

Despite there being a number of strong indicators of insolvency, many businesses still neglect to take action to recover their financial situation. This may be because:

  1. They are unaware of the insolvency warning signs and their financial predicament
  2. They are too embarrassed to seek help or believe they can handle it independently
  3. They underestimate the severity of their situation

It is essential to seek professional help at the first sign of insolvency. Neglecting to do so could result in more serious, legal action being taken against your business and in some circumstances, company directors can be held personally liable. Fortunately, in many cases there are steps that can be taken to turn poor financial situations around and avoid insolvency altogether.

At Wisdom Business Consultants, we can look at your company’s financials and work out a strategy that best suits your situation. It might include performance improvement, informal restructuring, voluntary administration or even liquidation of some companies if we don’t think the company can be saved. Either way, we’ll be upfront and share with you our professional opinion.

To get started, contact us here today!

References

Pearce & Heers. ‘Nine Early Warning Signs Of Insolvency’, Pearce & Heers Advisory Insolvency, Online, [No Date], https://pearceheers.com.au/insolvency-liquidation-blog/business/nine-early-warning-signs-of-insolvency/ (Accessed 25 July 2022)