The term “what does insolvency mean” is often used interchangeably with the word “bankruptcy.” However, there is a difference between the two: Insolvency describes a financial situation where an individual or company is unable to pay its debts as they fall due. Bankruptcy is a legal procedure where the courts supervises the liquidation of an insolvent person or business to realise their assets and pay their debts as far as possible.
There are two main types of insolvency: cash flow insolvency and balance sheet insolvency. Both mean that the debts owed outweigh the value of the assets held. However, in cash-flow insolvency, a business’s liabilities can be funded through future earnings while accounting insolvency only refers to the current value of the assets.
Grasping the Concept of an Insolvent Business: Insights and Analysis
Companies need to recognize insolvency as early as possible and seek professional advice. This will help to determine the severity of the problem and identify options for resolving it, including alternative arrangements such as Company Voluntary Arrangements (CVAs) and administration.
The early warning signs of insolvency can include late payment of tax and VAT, unsustainable levels of debt or the inability to borrow more money. Other issues that can lead to insolvency include poor financial planning, economic downturns and loss of a major customer or supplier. If a company is unable to address these problems, it may need to stop trading and enter into formal insolvency proceedings such as administration or winding-up orders. These processes can be rescued by taking steps to cut costs, reducing debt payments or seeking out buyers for the business.
