Other acronyms used to refer to insolvency include financial ruin, ruin, collapse, failure, liquidation and bankruptcy. The term applies to either a business or individual. A company is declared insolvent due to inability to pay debts when required. It is considered offensive when directors continue operations and incurring more debts while the company is bankrupt. There are two ways a business becomes bankrupt. They include through creditors asking a court to declare insolvency or voluntary filing of bankruptcy by an individual. When should you consider going insolvent?
Finances- this is the most common reason businesses decide to go into liquidation. Many businesses opt to take loans in order to finance their businesses. If a lender notices that a business struggles in repaying the loan, they decide to cut on additional funding. This leads to insolvency. Even when an owner manages to acquire some funding, this makes it difficult for the business to survive as there are no profits acquired due to payment of interests on the loan.
Wrong decisions- people who plan poorly make hasty decisions. This could cause failure in business. Most people put a lot of effort on a particular product without studying the cost of production and customers in order to know if it is profitable. A product might be useful to the consumers but with less financial viability from a business perspective. Some other factors that could contribute immensely to poor decision making include lack of experience and education in management and finance. However, every business is prone to make mistakes.
Current market conditions- an economy with poor market conditions as well as a particular market could cause insolvency in a business. Economies follow a certain cycle that comprises of recessions and lulls as well as booms of expansions. The bust periods lower the consumers’ confidence leading to minimal spending. This causes low generation of income. Also, businesses that engage in a particular product suffer from shifts in preferences by the consumers.
Avoid bankruptcy in your business.