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There are many factors which you should consider when you run your own business, especially those which could put you at risk of insolvency.
Even if your business is doing well, you should still be aware of the risks which could affect it.
Top 7 Causes of Business Insolvency
1. Lack of financial information
Without an in-depth analysis of your financial situation, it is hard to understand how well your business is doing. This is when problems can arise and take over. Hiring reliable and efficient bookkeepers and/or accountants will mean you will have business and cash flow forecasts on hand throughout the financial year, which is critical if you want to avoid insolvency.
This will mean you will have a solid understanding of where your business should be in the future, as well as allowing you to prepare for any business growth or expansion.
2. Cash Flow
Having an inconsistent flow of cash can be one of the biggest causes of insolvency.
Not having enough cash to cover payroll, business expenses, rent or unexpected costs will eventually lead you into serious hot water. Sales are never usually consistent month to month, which is why it is so important you are aware of your financial position each month. Having a particularly quiet month with not enough money to cover your costs could eventually lead to the downfall of your business.
3. Debt repayment
Staying on top of your business’s repayments is a vital part of a successful business. However, taking out too much debt is another one of the biggest causes of insolvency.
Over-borrowing money can put you in a difficult position, and you may become increasingly vulnerable to insolvency. This is another crucial factor which heavily relies on accurate financial forecasts. Not knowing how or when you will pay off your debts can be seriously detrimental to your business.
4. Poor budgeting skills
Failing to make a profit against your business expenditures can massively affect the success of your business, and could plummet you into insolvency.
Simple things such as buying more expensive products, high salaries and high rent can all add up and steer your business into financial difficulty.
5. Competition
Failing to keep up or compete with other businesses could eventually lead to your business losing out on its market share and popularity amongst consumers.
You must be ready to make changes to adapt to the ever changing market, otherwise you risk losing your customer base to your competitors. In turn, this will reduce your sales and overall profits.
6. Relying on loyalty
Over-relying on key customers or clients can result in your business becoming insolvent if they decide to stop using your services or move to your competitors. This can be extremely damaging if your business relies on making profit from them.
If one of your clients enters financial difficulty themselves, they may no longer be able to afford your services, or potentially pay for services they have already received.
7. Ignoring the issue
Business owners that ignore the problem only make issues related to insolvency much worse. Facing financial difficulties can be hard to accept, but the sooner you review your options the easier it will be to solve them.
If your business looks like it’s on the brink of becoming insolvent, Insolvency professionals can assist you in liquidating your own business to prevent existing issues from getting even worse.
