There are three key tests which will help you understand if your company is insolvent. These are the questions we ask businesses who come to us for help and advice regarding debt and cash flow.
As we advise our clients – it’s important to be brutally honest when answering these questions! It’s hard to admit the truth of a bad situation. Just remember, it will bring much-needed clarity and you’ll be one step closer to a solution.
1. Cash Flow Test
Can your company pay its debts when they are due?
Your business will have the usual monthly outgoings such as wages, PAYE, NIC, rent, utilities, internet, phone etc. Are any of these payments in arrears, do you have arrangements in place with any provider? Have you needed to extend supplier payment terms longer than the usual 30 days?
Are the responses to the above questions temporary or long standing? Is there a reasonable chance that the issues will be resolved in the short term? If the answer is no then your company could be cash flow insolvent and you should seek advice.
This case study illustrates an extreme example of a business owner struggling with bills and debts, and how we solved their problems.
2. Balance Sheet Test
Does your company have more debt than assets?
The company should have more assets e.g. cash at bank, machinery, debtors etc. than it owes out to creditors. Remember that debt could also include money the business owes to you as a director.
Ensure you consider any bad debts. If there are legacy debts on your debtor ledger that you know will never be paid, consider removing them. This will give you a truer picture of your company’s position.
3. Legal Action Test
Are there any warning signs that your company is struggling?
Examples could be any creditor issuing a CCJ (County Court Judgement), Statutory Demand or Winding Up Petition. Check out our Jargon Buster article to find out more about these legal actions and what they could mean for your business.
Any potential legal action from a creditor is a clear sign that your company is insolvent and this could mean the onset of insolvency.
The date that legal action takes place may later become the official date of insolvency. This date can be used against you as a director and create a personal liability if you don’t seek advice early enough in the process.
If you believe that your company is insolvent, it doesn’t mean you have to cease trading immediately. It does, however, mean that as a director, you have a legal responsibility to do something about it. Failing to do so could create a personal liability for you as an individual.
- DON’T increase the level of debt the company is in
- Treat all creditors equally; DON’T pay anyone ‘ahead’ of anyone else
- DON’T transfer / move / sell assets for less than they’re worth
If you’re worried about insolvency, we’re happy to have a free chat to point you in the right direction. Drop us a line via our contact form, email firstname.lastname@example.org, or call us on Lisburn: 028 9244 8112, Derbyshire: 01457 605 871 or Lancashire: 01254 914702.