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What are the signs that your business may be insolvent?

On Behalf of | Feb 18, 2022 | Business Law |

Business owners in Florida want their companies to thrive. However, sometimes, things don’t go the way you plan. There are certain signs to look out for that indicate that your business might be insolvent.

What does it mean to be insolvent?

You are considered as having an insolvent business when your company has financial problems. These problems can arise for a variety of reasons, but insolvency means that you are unable to pay back your debts, earn a profit to keep afloat and pay your employees. However, even if a business has plenty of cash, it can become insolvent if that cash was borrowed.

What are the common signs that your business is insolvent?

Certain situations can signify that your business is insolvent or is on its way to becoming insolvent. They include the following:

• Your company regularly lacks adequate cash flow
• You are unable to pay your employees
• Your company faces pressure from your creditors
• Your creditors are suing your business for debt payment
• You are withdrawing funds from your retirement plan
• You continuously have penalties for late payments toward debts
• You turn to one credit card to pay off another

What can you do to test for insolvency?

If your business is insolvent, it means you have serious financial troubles and might not succeed in the long term. There are ways to test for insolvency. The balance sheet test examines whether your liabilities exceed your assets. If this is the case, you would be unable to pay back your creditors.

The cash flow test determines whether you would be able to maintain steady cash flow. If you cannot do that for the reasonably near future, it means your business is insolvent.

In the worst-case scenario, business insolvency might require filing for bankruptcy. However, you might be able to improve your financial situation without resorting to that.