Take the Insolvency Test

How do I know whether or not my business is insolvent?

There are two tests of insolvency - the cash flow test and the balance sheet test.  If your business or company fails EITHER test you are deemed insolvent.

The cash flow test - Can the business pay all its debts as they fall due?

If a business cannot pay all of its debts in accordance with the creditors terms and conditions the business is insolvent.

Let us look at a couple of examples:

• Does your business pay all PAYE/NI deducted from the payroll to HMRC by the 19^th of the following month? 
• Can you pay your VAT on time?
• Do you pay your suppliers in 30 days when their invoices show terms of trade as 30 days?
• Can you pay your income tax/corporation tax on time?

If your business is unable to do ANY of this your company is insolvent.

Do you have a CCJ? Or is one threatened? If yes your company may be insolvent.

The balance sheet test - Do you owe more than you are owed?

Again let us look at a couple of examples:

• Does your balance sheet have brackets round the last figure? ie is it a negative figure?

Look carefully at your balance sheet. 

• Does it have a figure for stock that is too high? Would you purchase your stock for the figure in your balance sheet? No? Reduce the stock figure to the amount you would pay.
• Have you included everything in your balance sheet? You must include all current and contingent liabilities on your balance sheet. If not add it in.

NOW look at your balance sheet – is it still positive?

• Do you have an overdrawn director’s loan account? If so are you sure you are not taking too much out of your business?

If you answer yes to ANY of the above questions you must take advice immediately. If you fail to take the right action you can become personally liable and in certain circumstance you can also be criminally liable. Do not risk your future – take advice NOW.   The sooner you take advice the more likely we can rescue your company. A voluntary arrangement is helpful in most cases.