Here’s a common misconception: Companies only become insolvent because people don’t want the product or service that they’re offering. The business simply isn’t viable. And here’s the truth: Many companies become insolvent because people don’t want the product or service, and the business simply isn’t viable, but some become insolvent as victims of their own success.
How can a successful company become insolvent?
Cash flow issues are the reason for insolvency. Often a company is building up the debt by purchasing stock and property, hiring staff and buying equipment, hoping that the gamble will pay off. Most companies are making purchases, hoping all the while that they’ll find the customers to keep funds flowing in. What if the customers are already there? What if they’re lining up for miles down the road, desperate to buy your product? That’s great news if the sales process is quick. If you can easily find the money to pay your creditors, then you should have few concerns. If you have a delayed payment process (for example, you charge your customers by invoice and need to wait for them to pay), you’re putting your company at risk. If you take on too many orders, you need to buy the stock upfront. You can’t supply your customers with products that you don’t yet own! If customers are late to pay you, or even if they’re paying within their allotted time but aren’t doing so instantly, your business suffers cash flow problems. Money has gone out of the business but hasn’t yet come back in. You’re left with a deficit, unable to afford the things that you need to keep the business running. You might have so many orders coming in that you can barely keep up. That situation can be just as bad as an empty order book. The risks of a payment chain Whist your business can end up insolvent if you’ve paid for your stock up front, there is an alternative way of doing business that could make things even worse. Many companies work as part of a chain. The process might go something like this: • Your supplier sends you products. They invoice you for their products. • You pass the products on to your customer, as your part of the sales process. • You wait for your customer to pay their invoice. You still owe money to your supplier. • When your customer pays, you make your payment to your supplier. How long can you keep them waiting? Suppliers won’t keep giving you their products if you’re not paying for them quickly, and they certainly won’t care about your reasons. Your supplier has no interest in whether or not you’ve been paid; suppliers care about their cash flow, not yours. If a chain starts to break down, everyone can suffer. Your supplier ends up in the same situation, having provided their products on invoices that aren’t paid in a timely manner. Just as you’re waiting for a payment from your customer, with your cash flow suffering, your client is waiting for a payment from you and will need to fund the costs of their materials. Even worse is the risk that you’ll be left permanently without your money. If you purchase stock speculatively, or even by reacting to orders that are placed, do you have a plan in case those orders end up being cancelled? Can you send the stock back to your supplier without losing any money, or are you stuck with products that you then need to clear whilst minimising your financial loss?
Contact The Insolvency Experts
There are so many things to think about even when business is going well. Complacency can lead to some of your biggest financial issues. Get in touch with The Insolvency Experts today for more information on any of the services that we offer to businesses. Contact us online or give us a call on 0300 303 8284 and we’ll be happy to help.