How to Maintain Company’s Solvency in the Time of Crisis

The company’s ability to meet its long term debts as well as financial obligations is called its solvency. Solvency helps to show the company’s financial health and it also demonstrates the organization’s capability to manage its future operations. However, during a crisis, many companies struggle to maintain solvency. For instance, many companies have not been […]

The company’s ability to meet its long term debts as well as financial obligations is called its solvency. Solvency helps to show the company’s financial health and it also demonstrates the organization’s capability to manage its future operations. However, during a crisis, many companies struggle to maintain solvency. For instance, many companies have not been spared by the global crisis caused by COVID-19 and some may not be able to reopen after the pandemic. As such, read on to learn how to maintain the company’s solvency in the time of crisis. 

Check The Company’s Shareholder Equity

The most effective way of checking the company’s solvency is to check the shareholders’ equity from the company’s balance sheet. The shareholders’ equity includes the sum of the organization’s assets minus the liabilities. In other words, to maintain the company’s solvency, you must ensure that its assets are enough to settle the liabilities including factors like interest. The company should operate a health balance sheet that shows that the value of the assets is higher than the liabilities.

Once you realize that the company’s liabilities are overriding the assets, you need to be cautious about its solvency.  If nothing is done to rectify this impending crisis, then the company’s solvency might not be able to sustain its future operations. Alternatively, you can also consider engaging your financiers to check if they can assist with additional funding during the time of crisis. 

Consider Voluntary Liquidation

When the company has reached a tipping point in maintaining its solvency during a crisis, the members can consider voluntary liquidation. This is a legal process that allows the shareholders to formally wind up the solvent company’s business. Only licensed insolvency practitioners can act as liquidators and the process helps the company close out all outstanding matters. Following the company’s dissolution, the advice from Approved Recovery, explains that all assets and net funds are then distributed among the shareholders. The liquidator’s role is to ensure that the company’s assets get the best value and these can be in cash or specie. Additionally, the shareholders also get quick access to funds and the voluntary liquidation process is cost-effective.

Build New Cash Flow Forecast 

Following the outbreak of a crisis, the management needs to build a new cash flow forecast that is weekly based to closely monitor the operations of the business. Monthly cash flow forecasts can help organizations make informed decisions that take into account the “new order” caused by the crisis. You also need to consider the impacts of revenue generation while you build your cash flow forecast. The management needs to consider if the cash flow is still positive following the effects of the crisis so that they can take necessary measures to turn around the cash flow if possible. This rescue plan should help keep your business afloat during the period of the crisis. 

Consider Government Assistance

The federal government often assists distressed businesses during a crisis and they offer stimulus packages and other programs to different companies. It is important to consider how these support programs can help your business manage its solvency challenges during a crisis. If the programs can positively affect your cash flow, you can apply for assistance where necessary.

Take Necessary Steps To Reduce Expenditure Or Increase Revenue

You need to identify and eliminate non-critical expenditure in your business to maintain the company’s solvency during a crisis. Some overhead costs such as employee allowances, equipment leases, as well as rent can be adjusted or deferred altogether if possible. The same applies to loan repayment delays following agreements with the lenders to ensure the viability of the business during the crisis. 

Seek Legal Advice

The shareholders and management need to seek legal advice quickly so that they can take necessary measures to utilize the defenses available to minimize risk to the business. The responsible authorities need to take action that is likely to bring about a better outcome for the organization and the creditors instead of appointing a liquidator or an administrator. Legal advice helps the company prevent misconduct that can affect its status. 

During a crisis, many businesses often struggle to operate viably, and some experience solvency issues. A business that fails to meet its financial obligations in its operations will be facing insolvency which means that it cannot sustain its operations for a long period. To maintain the company’s solvency in times of crisis, the responsible operators need to ensure that the liabilities in the company do not exceed the assets at all costs.  Once the liabilities are higher than assets, maintaining solvency can be problematic. Voluntary dissolution of the company can come as the last resort when solvency issues persist in a crisis. However, shareholders in the company should seek legal advice in whatever action they decide to take. 

Photo credits: Unsplash

 

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