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7 Tell-tale Signs of Insolvency in Business

There is no definite assurance that a start-up will boom in the industry so it is always better to be aware of the signs that your company might not make it as early as you can to be prepared.
Below is a list of the indications that your business is closed to being insolvent, and you are in a dire need of insolvency advice.

Read More: Compensation for Employees When Businesses in UAE Close

1. Business Aesthetics

When you look around the office, does it look as exciting as it was before? More often than not, the way a business’s premises look can be a manifestation of the financial side of things of the company. If there is poor maintenance and the place is frequently filthy, they can be signs of physical deterioration of the business.

2. Payment Demands

There can be letters of demands and reminders of payments from your creditors for unpaid bills, and it is considered as a strong indication that things are not going well with your company. This simply means that payments are either late or payments are not made at all, as discussed in the next point.

3. Late or Non-Payment to Creditors

It is indeed a difficult task to keep up with financial obligations, and it happens to everyone. But if it is a constant incident with no signs of improvement, there can be a problem. This can mean that there is a problem with the business’ cash flow and even budgeting that the debt payment obligation is not being taken care of as it should be. It can impact the company’s credit score that can cause some long-term consequences.

4. Unable to Pay Salary to Staff

There have been a lot of cases in the UAE wherein some companies fail to give their staff’s salary on time or they are unable to do so completely. This is considered as a sure sign that there is imminent absolute insolvency.
In this kind of circumstance, the owner itself may not be taking his own salary from the business because of the state of its financial side.
After a few months or some time, the employees even have the right to file a complaint against you with the authority for the consecutive months of not having received any salary.

5. Disorganized Records

It is a positive trait of nearing insolvency of a business if its ability to maintain financial records or any other documents is consistent. It is always important to ensure that everything is kept in place so that records of how much is owed, forecasts for sales and cash flow, and any other necessary documents can be easily pulled out for the higher-ups to depend on when making vital decisions for the company.
However, if there is a failure in doing this because of difficulty after difficulty arising from here and there, it is not a good sign at all.

6. Lack of Cash flow and More Losses

There can be losses here and there and it doesn’t necessarily mean that the company is crashing. But if the losses happen more frequently than it should—yearly and even consecutively—the owner should consider seeking professional help.
Business is centered on income, and if there are more outflows than inflows, it can affect the business directly. For a business’s cash flow to properly continue, credit control and timely invoicing should be organized. If not, there can be a huge problem that can happen.

7. Maxed out borrowing

Borrowing money is a part of a business that’s after growth. However, if almost all credit facilities available are being availed by your company, it might not be a positive indication at all.
In situations like this, borrowing becomes normal for your business that you are almost reaching the debt ceiling or has already done so, being refused by banks or other loan institutions to borrow further. It can mean that a company is on the brink of financial collapse.
Another worse matter would be if a company’s cheques bounced, which is a strong indicator of insolvency.

You should know: Reasons behind the liquidation of companies in Dubai

It is imperative that you seek professional help if you meet even one or a couple of the items above. Farahat & Co. has specialist business liquidators in Dubai who are more than willing to give you a free consultation with regard to the status of your business.

Read more: How Does Liquidation Work for Insolvent Companies?

Mohamed Ali Farahat has worked on various forensic accounting assignments, which include operational and financial audits, reconstruction of accounting statements, financial information analysis, and investigation of fraud and financial distress. Read more