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Reasons for insolvency

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There are many reasons for corporate insolvency but the main factor is late payment by customers for goods and services. Although the construction industry is widely recognised as having the worst track record for paying bills on time, businesses in any sector can fall victim to cash flow problems and, as a result, not be able to pay their debts when due.

The problem with late payment

As Liz Bingham, president of R3 – the insolvency trade body – explains: “Even if a business has a great business model and great products and services, it won’t actually be profitable or successful until it gets paid for what it sells. Late payment is a threat that businesses need to take very seriously indeed.”

“The late payment problem can have significant knock-on effects within the economy too. The failure of one company can lead to even more unpaid bills and financial problems for others.”

Other reasons for insolvency

In addition to late payment, some other reasons why a company might become insolvent or be threatened with insolvency are:

  • Loss of market (for example, not recognising the need to adapt in a shrinking or changing marketplace, eroded margins or loss of technical competitive advantage)
  • Management failure (for example, not acquiring adequate skills through training or outsourcing, over-optimistic planning, imprudent accounting, lack of management information)
  • Loss of long-term finance
  • Excessive overheads
  • Over-ambitious expansion or acquisition

Prompt advice is key

The truth of the matter is that a large number of corporate insolvencies could be avoided if professional advice had been sought sooner. If your company is facing insolvency, whatever the reasons, you should speak to a Licensed Insolvency Practitioner as soon as possible. With their help you will be able to not only identify the reasons but also review whether or not business rescue is an option.

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