Five reasons for Company Insolvency

Company insolvency is a difficult topic. Failure is a word that every business owner dreads. Nobody sets up a company to fail, but unfortunately, it is a reality. It is important that you do not ignore obvious indicators that a business is in trouble as this will lead to problems going forward.

There are numerous reasons that lead to a business becoming insolvent, both controllable and uncontrollable, but there are always common factors in each case. Poor management, cash flow problems and excessive debts can all play a destructive role within a business.

It is also possible that issues have arisen which were out of the control of the company directors like losing an important customer that have led to serious issues. However, in most cases, company insolvency and liquidation are preventable.

To help you identify the warning signs that your business may be facing difficulty, our team have put together a list of the five main causes of company insolvency.

 

• Cash Flow crisis caused by limited funds:

Cash flow refers to the money that is coming in and out of your business. Cash flow is essential as it is needed to meet your obligations with your creditors. Lack of cash is one of the biggest reasons Irish businesses fail.

Cash flow problems particularly affect new businesses in the early stages of development. You may have a popular product that is growing in popularity and sales are increasing. However, that doesn’t necessarily translate into your business making a profit.

It is common for new businesses to be caught between suppliers who are demanding their money now and buyers who are slow to pay. When this is the case, even though your sales are increasing, a real cash flow crisis has been created.

Although your product is selling, the fact your buyers will not pay you in a timely manner is a major problem. You need to repay your suppliers, meet payroll and pay other business expenses. This may lead to your creditors forcing your business, that has a lot of potential, into liquidation.

 

• Not retaining customers:

Constantly looking for new customers is expensive. In fact, obtaining new customers can be up to nine times more expensive than retaining your current customers. Any business that does not value their current customers is destined to fail.

Quite simply, your customers are your business. Without them you have no sales and therefore no business. Treat them well, look after them and they will remain loyal.

Don’t ever fall into the misconception that your customers depend on you. The truth is that you are very much dependent on them. Make sure that they are fully satisfied with their experience.

Keeping a varied customer base is also essential for the success of your business. Over-reliance on a specific customer is a slippery slope. Your doors would be closed for business if your relationship changes. Building a diverse customer base by putting an emphasis on retaining your customers is essential.

 

• Company insolvency due to excessive business debts:

For most businesses, borrowing makes sense to finance growth. However, complacency regarding borrowing is a big issue with Irish businesses. Excessive debts are a risk for business even when they are enjoying a long period of stability.

There are several problems associated with excessive debts in both the short-term and long-term.

The major issue is that too much debt severely impacts your profitability. When you add high monthly interest payments to your existing business expenses, profit margins inevitably take a big hit. Plus, the longer your debt exists, the higher interest rates you will have to pay.

Debt places a major strain on your businesses finance. If you cannot meet the repayment requirements of your lenders it will ultimately lead to insolvency.

 

• Poor retention of important employees:

The most important aspect of any business is their employees. Retaining experienced and skilled employees is essential to the prolonged success of any business.

There are different reasons why an important employee would want to leave a company including monetary dissatisfaction, a negative environment and a lack of fulfilment in the workplace. As a business owner, it is your responsibility to counteract these problems as it will negatively impact your business otherwise.

Remember, training a new employee is expensive and there is no guarantee they will carry out the role to a high level. If you are constantly training new recruits and losing your experienced employees your business will find itself in difficulty.

 

• Poor management:

Bad management causes organisations to permanently close their doors. Regardless of the size of a business, it is impossible to run effectively without proper management. This is a mistake that a lot of new business owners make. They assume their experience in business will enable them to be effective managers. This is not the case, especially if a business is successful and grows.

However, management is a demanding job that changes from day to day. Bad managers often have challenges keeping employees focused and motivated on the job at hand. Also, poor managers can lack the necessary knowledge which leads to company funds being mismanaged or the budget being overextended leading to serious financial issues within the business.

Trust the experts

When a business is facing company insolvency or liquidation, the directors can look back at the decisions taken and identify what went wrong. Unfortunately, at this stage, it is too late. At Russell and Co., we will work with you to ensure you make the right decisions if your business is in trouble.

We offer free, impartial advice to company directors and our expert insolvency team can help you protect your business. Call us today on 021 4963679 or by email at info@russellandco.ie. We also provide a range of accounting services to Irish businesses including company formation, company audit and forensic accounting.