3 Tests to Find Out If You Are Insolvency-Bound

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Even if your business isn’t currently facing financial difficulties, it’s important to be proactive and aware of potential warning signs that could indicate insolvency is on the horizon.

By conducting regular checks and addressing issues promptly, you can take steps to protect your business and avoid a crisis.

Here are three key tests to help you determine if your company is at risk of insolvency.

Cash Flow Test

  • Is your business struggling to meet basic operating expenses?
  • Are you unable to afford necessary investments or upgrades?
  • Are you relying heavily on credit to cover day-to-day costs?

If you find it difficult to cover day-to-day costs like rent, wages or utilities, and do not have the funds to invest in growth or improvements, it could be a sign of cash flow problems. This may lead to insolvency in the future if not rectified.

Creditor Pressures Test

  • Are creditors becoming increasingly demanding or aggressive?
  • Have you received threats of legal action or winding-up petitions?
  • Are you unable to meet your debt obligations on time?

If you’re receiving frequent calls, emails, or letters from creditors requesting immediate payment, or you’ve even been served with a payment demand or winding-up petition, then this is a clear indication that your financial situation is deteriorating.

Ceiling Borrowing Test

  • Is your business maxed out on credit lines with banks and suppliers?
  • Are you constantly borrowing to stay afloat?
  • Are you relying on short-term loans to cover long-term expenses?

If you’ve reached your maximum borrowing limits from banks and suppliers, it may suggest that your business is struggling to generate sufficient cash flow. Likewise, it is unsustainable to continue borrowing to cover expenses, increasing the risk of insolvency.

How can I prevent Insolvency?

By being proactive and taking steps to address potential warning signs, you can increase your chances of successfully overcoming financial difficulties and ensuring the long-term viability of your business.

At My Insolvency, we specialise in helping businesses navigate financial challenges, so if you’re concerned about the health of your business or suspect that insolvency may be a possibility, don’t hesitate to seek professional advice. Give us a call at 0800 009 6106 or email hello@myinsolvency.co.uk for professional insolvency advice and support.

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