In the recent crisis, many businesses have suffered from financial drought. Many companies have even declared bankruptcy due to the enormous loss of profits, especially during this pandemic. A lot of people have lost their jobs and are at high risk of virus infection. That is why many have decided to just stay at home rather than going out shopping or simply hanging out, resulting in a massive profit loss that made businesses insolvent.
What is Insolvency?
Insolvency basically means that a firm can no longer pay all its outstanding debts as it becomes due. It happens when the business’ cash flow is insufficient to meet and satisfy its short-term obligations. Thus, the company’s total debts will exceed the total value of its assets.
In order to determine whether your company is insolvent, you need to list everything you owe (liabilities) such as credit card debts and bank loans, then add up everything you own (assets) like stocks, property, plant, and equipment (PPE), cash in bank, accounts receivables, etc. Once your liabilities exceed your assets, you’re definitely insolvent.
Furthermore, you can actually check your insolvency in two simple ways, i.e., through checking your Balance Sheet and Cash Flow.
In the Balance Sheet test, you can add all your current assets in one column and then your liabilities in the other column. You can easily know the status of your company by simply looking at the total comparison. Once your assets outweigh your debts, you are safe. However, if the figure states the contrary, then your company is in danger.
Moreover, the second way to determine your business’ financial position is thru a Cash Flow test. Cash Flow in your financial statements basically pertains to the movement of your cash, whether inflow or outflow. Therefore, checking this financial report allows you to analyze if the company can meet all its current or future obligations.
Signs of Insolvency
Insolvency can actually be treated or prevented. That is why it is essential to note the early signs of insolvency so that you can be able to obviate the high risk of being insolvent. Hence, given below are the warning signs of bankruptcy in every business.
- Poor cash inflow.
- Unable to pay debts on time.
- Experiencing massive and successive losses.
- Income could not suffice for the payment of staff wages.
- Too many unpaid bills.
- Constantly receives threats of legal action.
- Regular borrowing of capital to pay for creditors.
Once you experience any of these scenarios, you might want to take it as a serious warning. Do not wait for further signs because the longer you become insolvent, the lesser chance you can treat and save your company. Thus, you must always have an advisor when it comes to insolvency issues in your business. You need to look for someone who is professional enough to help you in addressing this financial concern as early as possible to prevent more losses and debts. So if your business firm stands in Israel, Adv. Maor Levi is the best עורך דין חדלות פירעון you can easily find and rely in town.