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Why Businesses Become Insolvent

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Why Businesses Become Insolvent

It’s not only businesses that have been on the rocks for a while that suffer from business insolvency. You may be always surprised by news of company after company becoming insolvent, despite their appearance of being completely stable and successful.

Whether your business is long established, or still growing, simple poor practices carried out by those in charge can cause your firm to go from stable and prosperous to insolvent in no time. We want to avoid this. So, let’s take a look at the most common reasons why businesses become insolvent so that you don’t make the same mistakes.

Cash flow

The backbone of a successful business is its cash flow. No matter how it appears on the surface, if the cash isn’t flowing right, your company will not survive.

When your business is making thousands of pounds a month, it’s easy to expect stability. However, the two do not go hand in hand. Taking out large sums of money from the business under the assumption that next month’s income will pay it off is first and foremost a mistake. If you plan on doing this, you need to be 100% sure your cash flow is strong. One small downturn in sales could be all it takes for your cash reserves and cash flow to come to a grinding halt.

You also need to make sure you keep on top of your credit control. Late-paying clients are one of the main reasons why company cash flows begin to falter. Weed out the problematic clients by investing in the most effective credit control. That way, your business isn’t affected by other people’s failure to pay for your services. This is essential to avoid business insolvency.

Loss of business from new competition

There’s nothing wrong with a bit of healthy competition. In the business world, it helps keep prices down for consumers while continually driving for better quality. However, problems start to arise when you begin to lag behind your competitors.

Ignoring fast-growing competitors could lead to a rapid loss in your business market share. This then leads to declining profits and a lack of cash to run your business effectively. To avoid this, you need to be prepared for any changes in the market.

Start by keeping a close eye on all of your competitors, no matter their size. Study your competition and make sure you offer a product or service that is of better quality (or better value) than them. Finally, make sure you’re selling in the right places. Most businesses operate online now, just as Blockbusters. Without customer access to your services via the internet, it is likely you will lag behind. So, make sure your IT infrastructure is up to date to accommodate the growing demand for internet services. Do this, and you’ll keep insolvency away.

Loss of important customers

To avoid insolvency, don’t let your business become dependent on one client, or one supplier. This is the start of a slippery slope towards business insolvency. Putting all of your eggs in one basket means that if something goes wrong, and you lose your client, your whole business will suffer for it. You need to focus on obtaining enough customers to make sure client losses are not devastating. Always aim to acquire new customers and clients that contribute more significant amounts of income than the one large customer your business depends on. Then you’ll have alternative sources of income if your biggest client fails.

Irwin & Company is experienced in helping businesses deal with insolvency, making sure you have every option available to you, so you can put your best foot forward and recover from your insolvency.