Going Broke? - The Warning Signs

Going Broke!  Two words that strike fear into any business owner’s heart. It also strikes fear and panic into a creditor dealing with that business.

Insolvency is the inability to pay your debts when they fall due. That is, going broke.

Bankruptcy is the formal state when people or sole trader or partnership cannot pay their debts and declare bankruptcy.

Bankruptcy does not apply to companies, only to individuals. A company goes into liquidation rather than bankruptcy. Bankruptcy involves court proceedings, where the person who becomes bankrupt loses all his/her assets.

Those assets are taken over by a court official whose job is to collect the assets and realise them for cash, which is then used to pay off the outstanding bills.

There are no hard and fast rules to work out whether a business is going broke or not. That is, when the business is insolvent. In simple terms, insolvency is when you don’t have the cash to pay your bills when they fall due.

As soon as you suspect that your business is going broke you have to immediately take action to try and resolve the situation. This could mean collecting money owing to the business, arranging a loan, or selling some assets.

Warning signs you need to watch in insolvency include the following:

  • You can’t pay your bills when they are due.

  • You find your sales are dropping.

  • Your shareholder’s funds start to decrease.

  • Your margins are being eroded on your sales.

  • Your overdraft is climbing and it never seems to drop.

  • You are finding that you need to buy more and more on credit because you don’t have the cash to pay up front.

  • You find your suppliers and other creditors are ringing all the time seeking payment.

  • You find that your bills are mounting up so they take two, three or four months to pay.

  • In general you have come to the conclusion that your business is struggling.

© 2005 StartRunGrow


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