While dealing with any company or making any investment often the busy company directors may not seriously investigate about the financial condition of that company, and as a result they have to suffer later.
There can be a few clear warning signs of company liquidation that can always be seen if the management is alert and notice any of the following warning signs.
1. Insufficient cashflow
It is essential to observe the cash flow status of the company and if it is found that the company is consistently failing to make payments due to lack of funds for covering their essential operating expenses, then one must be alert. It is then just an initial sign before it turns into insolvent.
2. Balance sheet not clear
To find this, you need an expert who can check the company balance sheet carefully and find whether their liability is exceeding their available assets. The company will be about to go into insolvency if it has more liability than assets.
3. Maximum borrowing
If you notice that suppliers are refusing any credit, and the company does not have enough assets to get any secured short-term loan.
Also, if checks of the company have bounced, then it is a warning sign that company is likely to be insolvent sooner than later.
If you notice that company is functioning at the limit of their overdraft, then this can be a very clear indication that the company has serious cash flow problems and it is just a matter of time, the company is likely to be insolvent.
5. Creditor pressure
If you notice all the lenders of the company are regularly chasing the company for payment and the company is failing to meet their payment commitments within the agreed timeframe then it is a clear warning sign for insolvency.
6. No reliable MIS
If you find that there exists no clear management information system within the company so that you may find the performance of the company, then it can be a sign of mismanagement.
On such condition, it is very difficult to find how much debt the company must be having and it will be dangerous to do any business with such company.
7. Demands for payment
If you notice the company is receiving statutory demand from all secured/unsecured creditors, or getting regular threats of any legal action because of many unpaid bills.
Usually statutory demand will be closely followed up by winding up petition, that can effectively indicate end for that company.
8. Wage commitments not met
If it is noticed that the company employee wages are not paid in a regular manner then insolvency of the company is just on the door.
9. Secured finance
If the company is trying to factor in on secured loan then the company is vulnerable to be under bank control any time.
10. Constantly dealing with some problems
If it is noticed that the company management is spending most of their time in ‘fire-fighting’ to prevent problems to escalate rather than focusing on day-to-day business activities, then you must be seriously alerted about the overall health of the company.