An insolvent business is a company that can’t pay its debts when they come due. While there are many reasons a company can become insolvent, the two most common are poor financial management and cash flow problems.

Poor financial management may include a lack of budgeting and forecasting, not keeping accurate records and failing to monitor cash inflows and outflows. This can lead to a cash shortfall that makes it difficult to meet payments to creditors, suppliers and employees. Cash flow problems can be caused by poor sales or a lack of new investments. For example, if a business doesn’t evolve its products to suit changing consumer demands then it could lose customers to competitors that offer more choice.

Diving Deeper into Insolvency: Implications for Companies

A company can also become insolvent if its assets are less than its liabilities. This is known as balance sheet insolvency. Often this is the result of poor cash flow, but it can also be caused by overtrading or investing in new growth when the company can’t handle it. Insolvency can also be caused by trading while insolvent, which is against the law and can lead to personal liability for directors and shareholders.

If a business is insolvent, an administrator will likely be appointed to take control of the company. The administrator will work to maximize the chance of the business’s survival and get creditors the money they are owed. If the company doesn’t survive, it will be liquidated. This is where the assets are sold to pay off debts. This process is usually carried out by an insolvency practitioner who will look for a pre-pack sale or a sale on the open market.