How To Know When A Company Is Nearing Insolvency

It is not exactly hard to know when a company is nearing insolvency. No director, manager, or even supervisor would come out and tell employees that the organization will soon collapse.

How To Know When A Company Is Nearing Insolvency

Assuming you are even suspecting at all, they will even start giving assurances that might cast the doubt out of your mind. Well, it is part of management.

Let us be honest; no one wants to be caught unaware and left hanging in the event of bankruptcy. The stress of dealing with job loss, a source of income loss, as well as having to start job hunting again…whew! I would not wish that on anyone (not like it does not happen anyways).

It is as important to know when a company is about to go down as much as it is important to spot the signs early.

You may have been working in the company for the past 10 years and have so much confidence that nothing could go wrong.

Even if your company’s financial condition has never been a reason for concern. An unexpected downturn in the market can easily have critical implications on your business.

Okay, wait…let’s take it back a notch.

What really do we mean by a company being insolvent or nearing insolvency?

A company is insolvent if it is no longer able to pay its debts or fulfill other financial obligations as they fall due. Debts or such obligations could be restocking, paying utility bills, and in most cases, paying workers’ salaries or wages.

Business Cash Flow Vs Insolvency

Let us address something before we delve into the signs to look out for to know when a company is nearing insolvency.

It is something that most people could easily confuse for a sign. Company cash flow problems aren’t necessarily an indication of company insolvency, but it’s always something to be wary of.

Many factors can cause cash flow issues, such as low sales and a lack of credit control. Most times, these sorts of issues are just temporary. However, it’s important to understand exactly what is causing problems and be in control of your cash flow on a daily basis, detailing income and expenditures, to stay on top of any issue. Over time, recurring cash flow problems will undoubtedly worsen if you don’t put any steps in place to deal with them.

So, here are some signs that you should look out for to know when your company is nearing insolvency. It is important to note that these are just SIGNS and often do not guarantee insolvency.

You are being owed salaries

No responsible employer would love to owe salaries, at least we can all agree on that. If all of a sudden, you just start getting delayed salaries or being paid in tranches, start getting wary. Unless you have an irresponsible management team, your welfare as an employee in terms of payment as at when due should be paramount.

Also, payment of salaries is part of financial obligation or debts on the part of the company. If they fail to meet this at any point, then there is a problem.

Company owes more than they have

In this case, you may not know the true state of things unless you have close rapport with some top-level management or client. This might seem like a sweeping statement of what can be a complex picture but, in the end, a company’s soundness depends on having access to more assets than they owe in debts or liabilities. Assets of course can include any equipment or property the company owns, as well as bank account funds and debts.

High rate of retrenchment

The signs that a company is doing well would reflect in their rate of employment. Usually, when a company or business wants to expand, they hire more instead of fire. If your organization starts firing and not hiring, then there is a problem.

Inability to cover basic operating costs

Efficient management of funds is a vital part of rationalizing and optimizing a business. But when basic operating costs can’t be covered, then there might well be underlying issues to be addressed.

This will be pretty easy for anyone to figure out. When there is a scarcity of paper in the copier machine to make photocopies, when the hand sanitizer has been empty for weeks long, these are indicators of low funds.

For small businesses, cash flow can be irregular, and sometimes blockages need to be overcome. But too much of an imbalance can be a sign that something is basically wrong with your organization’s finances.

No business director, founder, or manager wants to accept that their company is in fact in heading towards insolvency, but there are times when the reality cannot be avoided.

At times like these, ignoring these issues can often make them worse.

As an employee, it is good to be loyal. But while doing that, dust your resume for a revamp. Well, you can save yourself the stress- we can help with that- and start job hunting.

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