"A Company can be insolvent without being bankrupt, even if it's only a temporary situation. If that situation extends longer than anticipated, it can lead to bankruptcy."
Business Insolvency vs. Business Bankruptcy
What Is Insolvency?
Insolvency is when an individual or company can no longer meet their financial obligations to creditors as debts and liabilities become due. Before a Company gets involved in insolvency proceedings, they will likely be involved in informal arrangements with creditors, such as setting up alternative payment arrangements. Insolvency can arise from poor cash management, a reduction in cash flow, or an increase in expenses.
Business Insolvency is a state of financial distress in which a Company is unable to pay their creditors and liabilities.
Insolvency in a Company can arise from various situations that lead to poor cash flow.
When faced with insolvency, a business can attempt to restructure debts to pay them off.
Types of insolvency include cash-flow insolvency and balance-sheet insolvency.
If a Company chooses to attempt Restructuring, the Company creates a realistic Restructuring Plan illustrating how they can reduce company expenses and cash outflows, and continue carrying out business operations. The Restructuring Plan details how the debt and liabilities may be restructured using cost reductions and other strategies for saving cash flow. Creditors can review the Restructuring Plan to see how the business may produce enough cash flow for profitable operations while paying its debts.
Factors Contributing to Insolvency
There are numerous factors that can contribute to a Company’s insolvency. A company’s hiring of inadequate accounting or human resources management may contribute to insolvency. For example, the accounting manager may improperly create and/or follow the Company’s budget, resulting in overspending. Expenses add up quickly when too much money is flowing out and not enough is coming into the Company.
Rising vendor costs can also contribute to insolvency. When a Company has to pay increased prices for goods and services, the Company passes along the cost to the customer. Losing customers results in losing income for paying the Company’s creditors and other balance sheet liabilities.
Insolvency vs. Bankruptcy
Insolvency is a type of financial distress, meaning the financial state in which a Company is no longer able to pay the bills or other obligations. The IRS states that a Company or person is insolvent when the total liabilities exceed total assets.
A bankruptcy, on the other hand, is an actual court proceeding and order that depicts how an insolvent person or business will pay off their creditors, or how they will sell their assets in order to make the payments. A person or Company can be insolvent without being bankrupt, even if it's only a temporary situation. If that situation extends longer than anticipated, it can lead to bankruptcy.
Bankruptcy is typically a last resort option for a Company in financial distress and normally leads to a Company’s shutdown and liquidation.
If you are considering bankruptcy as an option for your Company, speak with us first to discover alternative strategies to deal with insolvency without filing bankruptcy.
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BUSINESS DEBT & CASH FLOW SOLUTIONS
Bernarsky Partners LLC is a business financial services advisory firm comprised of finance professionals with extensive industry experience offering Business Debt Solutions.
Some of our Business Debt Solutions include:
2. RESTRUCTURING BUSINESS DEBT
4. BUSINESS CASH FLOW ANALYSIS
Setup a free consultation call with us to review your business debt and cash flow situation, business goals and to discuss Business Debt refinancing and restructuring options.