Regardless of whether your business appears to be thriving or if you are struggling financially, it is important that any and all business owners understand the key tricks to determining if their company is solvent or not. 

This blog will discuss more about company solvency, why it is important, how to carry out a company solvency test, and what you should do if you discover that your business is in fact insolvent.

What is Company Solvency? 

Company solvency refers to the ability of a business to meet its current ongoing financial obligations. Being able to meet long-term debts and financial obligations is one of the most important measures of assessing the financial health of a company. A business unable to do so is considered financially insolvent.

A company deemed to be insolvent must cease trading immediately and terminate all current and future contracts — or risk serious consequences. Insolvency does not mean the business is doomed to fail however. There are multiple options available to a struggling owner that could see them turn around their fortunes. This includes administration, business recovery, and more. 

However, should none of the potential options be viable, the company may need to be closed down via liquidation in order for creditors to be paid back whatever they are owed. 


Why is Company Solvency Important?

The importance of company solvency is relatively easy to quantify. It can be traced to the fact that solvency is seen as a general indicator of how viable the business is in the immediate and foreseeable future. Ultimately, a solvent business that can pay any and all obligations is, in most cases, seen as more healthy than one that cannot. 

Additional reasons why company solvency is important include: 

  • Legal requirement: Solvency is necessary for a business to be considered eligible to trace legally. 
  • Easier acquisitions: A record of solvency makes the business acquisition/sale process significantly smoother.
  • More attractive: A solvent company/a company with a history of solvency will be much enticing for any potential investors.
  • Better loans: Longer term financial help can make you a more viable candidate for a loan

Ways to Perform a Business Solvency Check 

It is crucial for any business owner to independently review their finances. This should be done in order to find out if the company can be deemed solvent or not. There are three main ways to perform a business solvency check; these are a balance sheet test, a legal action test, and a cash flow test. 

The three recommended tests can all be beneficial individually — however they are much more impactful when considered as three small sections of a larger image. Undertaking all of the available tests allows you to gain a more complete and reliable picture of your businesses financial position. These three checks are as follows: 

Balance Sheet Test

The balance sheet test is a method of determining a company’s insolvency status by checking its shareholders’ funds. This method posits the idea that if your company liabilities outweigh your assets then you should be considered insolvent. 

For the balance sheet test to be done properly, the test should include any future and contingent liabilities such as deferred payments. This is done in order to glean a true and honest assessment of the company’s finances. Excluding this form of liability would lead to inconclusive and misleading results. 

Legal Action Test

The legal action test determines a company’s solvency status by looking into whether the business has any current outstanding statutory demands or unanswered court orders. 

If a business has a County Court Judgement (CCJ) against it, or has failed to pay a statutory demand for an outstanding debt exceeding the £750 threshold, it would be deemed insolvent and is vulnerable to winding up. 

An inability to meet such obligations is an indicator for any creditors that the company should potentially be wound up. 

Cash Flow Test

Another indicator that a business may be insolvent is to assess its current cash flow. If your company is frequently unable to pay its regular bills on time, it should be taken as a clear sign that the company is on shaky ground. 

The cash flow test seeks to ascertain whether the business in question is able to pay all of its liabilities ‘as and when they fall due’. When undertaking this test, it is important to look at all current obligations, as well as any future obligations that are fast approaching. 

If you are unable to meet these routine costs, then the next step should be to contact an expert financial specialist as soon as possible to improve your financial situation. 


What To Do If You Think Your Company is Insolvent?

After conducting the recommended tests and if you reach the conclusion that your company may be insolvent or on the brink of insolvency, the most important thing is that you do not continue operating business as usual. Fighting against the tide is a surefire way of allowing your position to deteriorate beyond repair. 

If you find yourself in the position of operating an insolvent company, or a company on the brink, it is highly recommended that you contact a professional as soon as possible. A licensed insolvency practitioner can play a vital role in helping to turn your situation around. 

A licensed insolvency practitioner will embed themselves within your business in order to conduct a thorough review of your operations and finances to gain a clear understanding of exactly the extent of your issues. Once this is done they can assist you with a variety of different services designed to make the next steps as simple and stress-free for you as possible. 

The role of a licensed insolvency practitioner when dealing with an insolvent company can include the following:

With a licensed insolvency practitioner, it is always worth remembering that while they are on hand to assist and advise you, their primary responsibility is to ensure that any creditors you may have receive what they are owed and that their best interests are served.

How Inquesta Helps with Company Insolvency 

Should you undertake a company solvency test and discover that you are insolvent or on the brink of insolvency, instructing a licensed insolvency practitioner will be vital for securing your immediate and long-term future. 

An insolvency practitioner will offer you their professional opinion on your operations, as well as which steps they believe are worth taking next. They can be on hand to assist you in insolvency, in turning your business around, or just to offer advice in a stressful time. 

With decades of experience helping with company solvency, Inquesta’s team of specialist insolvency practitioners are perfectly placed to help you through a difficult time and provide dedicated, expert assistance. Find out more about what Inquesta can do to help you by booking a free consultation or contact a member of our team today.