Is Your Business on the Verge of Bankruptcy? 5 Warning Signs Your Company is Approaching Insolvency

Whether your business is growing exponentially month after month or generating stable profits, executives’ poor business choices and mismanagement of funds can quickly lead a thriving corporation into insolvency.

When individuals or companies can no longer meet their financial obligations, they become insolvent and risk losing personal assets to pay back debts.

Some businesses face a cash flow crisis brought on by a decrease in customers, while others fail due to steep competition and mismanagement. No matter the cause, every business is susceptible to insolvency without immediate action steps and detailed budgeting. Regardless of how well your business is doing, it’s wise to devise an emergency plan to dodge financial disasters leading to insolvency and bankruptcy.

Unlike bankruptcy, insolvency isn’t a permanent scar on your business. Instead, it’s a period where a company catches up by selling assets, increasing income, or borrowing from a trusted individual. Once you repay your debts, your insolvent status will dissipate, allowing you to return to business as usual. However, if you’re inching toward insolvency with no end in sight, consider filing for bankruptcy to protect your business from destruction.

To rescue your company from insolvency, immediate action is necessary. Start by increasing customer revenue, searching out cost-cutting areas, and explore aid funding options to dodge bankruptcy. However, if all else fails, declaring bankruptcy may be the best option. Businesses in hot financial water should rope in a bankruptcy lawyer such as wh Law to prove their insolvency and negotiate with the courts.

Headed down the financially precarious path to insolvency? Watch out for these five warning signs and nip lousy money habits in the bud to avoid economic uncertainty.

1. Your Cash-Flow is Gradually Decreasing

While you can expect to have sub-par periods where your business brings in less revenue, it’s a bad sign if reduced cash-flow becomes regular. If your company has seen a significant decrease in revenue two months in a row, investigate additional income-increasing methods and minimize overhead costs.

2. You’re Regularly Receiving Late Payments From Customers

Late payments made by customers are another reason businesses cannot pay creditors on time. Suppose your corporation offers payment terms that are unnecessarily long or don’t have a collection procedure in place. In that case, you’ll likely continue to receive late payments and not pay your creditors on time.

3. You’re Not Taking a Salary

Struggling to pay employees and yourself is a red flag for imminent insolvency. Waiting for a large sale or payment to go through may pay off previous debts, but it leaves you unable to save for the future and make a livable wage yourself. 

4. You Have Too Much Inventory

While having an inventory on hand to avoid long wait times is critical in any successful business, storing too much unused merchandise can wreak financial havoc. Keeping mass-amounts of products that isn’t congruent with client needs indicates a financial incongruency. You’ll either need to increase clientele or decrease inventory to keep a tight bottom line and avoid insolvency.

5. You’ve Reached Your Borrowing Limit

If you’ve reached borrowing limits with creditors who are now refusing to service you, you’re likely on the verge of insolvency. Instead of acquiring further funding, reassess your situation and look for ways to decrease costs and pay off your current debts.

The Bottom Line

Although facing insolvency and eventually bankruptcy can be challenging to bounce back from, there are ways to transcend financial mishaps by carefully monitoring warning signs and leaning into solutions if hardship does come your way.