Although the loss of a job, too much credit card debt and excessive medical expenses – in the US, at least – are the top reasons for people to become insolvent. When it comes to business insolvency, however, the reasons for it are very different. In the UK, one in every 386 businesses will end up in insolvency so it isn’t that rare. However, insolvency doesn’t necessarily mean that a business will be gone for good, either. In many cases, they can be rescued, especially when expert assistance is brought in at an early enough stage. That’s something we can help you with at Salient Insolvency, particularly if your business faces financial stress for any of the most common reasons, as outlined below.
Cash Flow Problems
Although they may be short-term, problems with cash flow can lead to severe operational difficulties. If you don’t have the money coming in to handle day-to-day expenses, then your business can fail to deliver its goods and services so customers look elsewhere. In short, temporary cash flow problems can soon snowball into more serious operational issues. If you are falling behind with payments, then now is the time to take affirmative action.
The second most common reason for insolvency proceedings to start is that a firm has become overburdened with debt. This may not be because of any failure of leadership or commercial nous. Interest rates can change unexpectedly, after all. One late payment to a creditor because of a one-off cash flow problem could lead to a change in terms which means your debt starts to go up instead of down.
Loss of Income
When a business suffers from a loss of income it is usually for one of two main reasons. It could be that an important client is lost or goes out of business. The other reason is that your credit control system isn’t functioning well enough to keep your income at the level it should be. Overhauling your systems or seeking replacement customers takes investment, something that can be tricky when there aren’t sufficient funds around. As a result, insolvency proceedings may follow a significant loss of income.
Increased Operational Costs
If you rely on contractors or skilled internal staff, then changes in the wider economy may hit your operational costs. Equally, doing business might rely on certain equipment working or being replaced. If your cost base is rising but the market won’t bear an upturn in prices, profitability will necessarily suffer and you could end up making an operational loss.
Your business competitors can cause insolvency indirectly in two ways. Firstly, they might attract your best customers or eat into your market share so your company turnover takes a hit. The other way that competition adversely affects businesses is when they are able to poach your best staff making your firm less productive. If so, it can become part of a wider picture of underinvestment, something that is difficult to turn around if you run an established firm rather than an up-and-coming one.