What exactly is insolvency?

The dictionary definition of insolvency is less than illuminating, it is:

The state of being insolvent…

Listed synonyms provide more detail:

bankruptcy · liquidation · failure · collapse · ruin · financial ruin · ruination · pennilessness · penury · impecuniousness · beggary · administration · receivership · folding · pauperdom

What these explanations do not provide is a definition of the state of insolvency. A simple definition could be the insolvency occurs when we are unable to meet our obligation to settle debts by the required due date.

In a business sense, a firm can be said to be insolvent its assets are less than its liabilities, but even this definition does not quite hit the spot.

Imagine that you use all your available cash reserves to purchase stock. To place this in a current context, you might consider this as a strategy to avoid supply line issues in the event of a no-deal Brexit.

You have no issue with doing this as you are owed a significant sum by your major customer that will restore your cash flow before bills and salaries are due at the end of the month.

But what happens if your customer is suffering cash flow issues and is unable to pay?

On paper, your business will be solvent. As long as your delayed payment from your customer does not become more serious, in time your cash flow will be restored, but how will you pay your bills at the end of the month?

Without private funds that you can introduce to see you through this impasse or the support of your bank, how will your staff and other creditors respond if you have to go cap in hand and explain there will be a delay in paying them?

Cash, liquidity, really is king, and lack of cash can actually place your business in the same position as an insolvent firm.

If you are concerned that you may be skating close to a cash flow crisis or a deeper insolvency, please call so that we can help you figure out your available options. For certain, pretending that all will work out well in the end may not be the best strategy to apply.

Share:

Share on facebook
Share on twitter
Share on pinterest
Share on linkedin
Accounting in Sheffield and Doncaster Certificates

Recently Added News

Why go digital?

There is a major advantage to recording business transactions digitally; once the basic data has been entered it can be interrogated and represented in endless

Read More »

Related News

The transition period has ended

From the beginning of this month the Brexit transition period has ended. Negotiations to secure a trade agreement between the UK and the EU from

The end is nigh

In just three short months the present tax year – 2020-21 – will end midnight, 5th April 2021. The UK’s tax code is predominantly time

Quick Links

Online References...
Client Testimonials
Meet the Team

Sheffield Office:
2 President Buildings,
Savile Street East,
Sheffield ,
South Yorkshire,
S4 7UQ

Telephone:
0114 272 0306
Fax:
0114 272 6158
email:
sheffield@roystonparkin.co.uk

Opening Hours:

Mon-Wed: 8.30am – 5pm
Thursday: 8.30am – 7pm
Friday: 8.30am – 2pm

Doncaster Office:
3 Railway Court,
Ten Pound Walk,
Doncaster,
South Yorkshire,
DN4 5FB

Telephone:
01302 320444 / 304440
Fax:
01302 342604
email:
doncaster@roystonparkin.co.uk

Opening Hours:

Mon-Thurs: 9am – 5pm
Friday: 9am – 4.30pm