As a business owner, one of your top priorities should be familiarising yourself with insolvency and knowing how to avoid it. Insolvency happens when a company can no longer pay its debts because of financial hardship, and the earlier it’s recognised, the less detrimental its effects could be. There are a few tests listed below to check whether your company is nearing insolvency and if flagged up, will help you avoid liquidation. As soon as you suspect your company is becoming insolvent, you should contact a licensed insolvency practitioner.
We are a Newcastle based firm of liquidators and insolvency practitioners, available to provide practical and impartial advice about any financial hardship your company may be facing.
Cash flow test
Poor cash flow management is an early sign of business insolvency. The cash flow test checks whether a business can pay its liabilities when they are due. If your business is unable to pay its debts on time, it is most likely insolvent. You will need to monitor your business’ income, expenses, assets, and liabilities to maintain a healthy cashflow. It helps to have extra cash in the company’s account in case any financial issues rise. If necessary, hire an accountant to keep on top of your finances.
Balance sheet test
The balance sheet test checks whether the total value of your business’ assets are more than its liabilities. Failing the balance sheet test would mean that your debts exceed your assets, and your company may be insolvent. Testing this with a qualified accountant is highly advisable, as there will be less room for error. Don’t wait until the end of the financial year to test your balance sheet.
Legal action test
If your company has continuously failed to repay a debt with the value of £750 or more to creditors, they may take legal action. The legal action test checks if your company has received any Statutory Demands or County Court Judgements (CCJ) seeking the recovery of the debts. CCJs not only indicate insolvency but also negatively impact your company’s credit rating. These legal actions usually require a response within 14 working days, and if your company does not respond, creditors can start bankruptcy proceedings against your company or petition to wind up (close) your company.
Failure of the legal action test is usually an indicator that your company is at risk of liquidation – forced closure.
When and where to seek advice
While your company might pass some tests and fail others, it’s important to seek professional advice as soon as you have identified any of the warning signs. At Connect Insolvency we pride ourselves in providing expert insolvency and liquidation advice in both a professional and personal capacity throughout the North East. Whether it’s regarding company voluntary arrangement, administration or compulsory liquidation, you’ll be able to get a no obligation discussion by one of our Newcastle practitioners by getting in touch at firstname.lastname@example.org or by calling our office at 0191 816 1416.