Even though everyone starts a business with the dream of making it big, the unfortunate reality is that most of them can end up in insolvency and bankruptcy. This can be due to a variety of reasons, ranging from cash flow issues, taxation problems, lower sales, and so on. Below, we will look at six usual reasons why a business may end up filing insolvency.
Business needs a continuous supply of money to keep running. And a large portion of this money supply is derived using credit. However, when your business is in a bad phase, those who provide you loans might cut you off from further credit. This obviously will put a business in a tough position. And as more and more institutions reject your business, you will find it extremely hard to keep your business floating. As a result, it is very likely that you may have to file for insolvency because of a lack of access to credit.
Very Few Customers
When your business is not able to generate sales, your revenues will go downhill. And since your expenses will remain almost the same, you won’t be able to meet all the payments because of a lack of cash. So, if you see that the company’s sales have been declining over the past few months or you learn that the sales will decline in the coming months, then you should start taking immediate steps to boost the sales so that the revenues from sales remain consistent. Otherwise, you will have a tough time running the business profitably, and may even have to file for insolvency.
Are you able to pay your taxes on time? If not, then that is something to be concerned about. Generally, a business will be unable to pay taxes because they cannot find sufficient funds for it. For example, according to your annual records, the business may have to pay $100,000 in taxes. But if you are unable to generate that much money when tax becomes due, then filing an insolvency may be the only way out.
To ensure that such a situation does not happen, it is recommended that you keep a part of the monthly profits as a reserve so that when it is time to pay the taxes, you will have enough money to do so. For this purpose one of the best solutions worth considering for business and personal tax preparation is Turbotax , you can read the best Turbotax review at MyDealsClub to help you choose the Turbotax program to suit your needs
Cash Flow Problems
Try to ensure that you collect the dues at the correct time so that you have the necessary cash to pay off your expenses and debts on time. If your customers do not honor the receivables and make big delays in paying you the dues, then you will also have problems in making timely payments to your debtors. When such a situation continues for several months, then eventually you will have no option but declare insolvency since the negative cash flow will strain your business and make it extremely unprofitable to run.
Too Many Withdrawals
Many business owners have a habit of withdrawing money from their businesses every time they make a profit. This is not a good habit. One has to understand that a business does not make profits every single month. There will be ups and downs in revenues and profits. As such, if you end up taking out the money when in profit, then you will be in big trouble when your business hits a rough patch and the revenues fall very low.
Since all profits were already removed from the business, you won’t be able to meet the expenses at such times. Consequently, you may have to file for insolvency. So, make sure that you never take out all profits made by your business. Keep a part of it in the business itself so that you can use it to overcome tough financial conditions. It is also recommended that you seek out insolvency advice from Antony Batty in case you find your business heading towards bankruptcy.
One of the major reasons why many companies become insolvent is due to their incorrect investment decisions. If you bet most of the capital on something and it turns out to be a dud, then you are very likely to be in a lot of debt and even unable to meet the payments on time. Hence, your business can become insolvent. To avoid such incidents, ensure that you always thoroughly check out all your potential business investment before you bet on it. And as long as your investment decisions are good, you won’t have to worry about insolvency.