How to be free from insolvency has been on the minds of many, especially when you start dealing with money. It’s a question you ask yourself as you start growing and want to be free from debts.
Having knowledge on how to be free from insolvency can give you an edge over your peers because you start implementing steps. Implementing these steps would help you be free from insolvency.
In this article, you would be educated on the path of freedom from insolvency. To benefit greatly from this post, make notes of important points that can help you greatly.
Before diving into the practical ways to be free from insolvency, let’s have a knowledge of what insolvency is.
Knowing what insolvency is would allow you to avoid it because a problem known is solved.
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What is insolvency?
Understanding insolvency can be a key to freedom from it.
Insolvency is the state when you are unable to pay the money you owe to a person or a financial institution, on time.
You might have not been able to pay because of some issues that came up. This places an insolvent mark on you.
I know this can be very frustrating especially if you borrowed money from a loan shark.
But even with the interest rising on your borrowed money it is essential that you find a way out.
For informative purposes, there are two forms of insolvency namely cash-flow and balance sheet insolvency.
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This occurs when you have enough assets to pay a debt but don’t have an appropriate form of payment. For an easier explanation let’s look at it this way; you own an expensive car and a house but don’t have the liquid asset to pay your debt when it is due.
Balance sheet insolvency
Balance sheet insolvency is also known as technical insolvency. This occurs when the value of your assets is less than the amount of your liabilities.
Knowing the difference between the two forms of insolvency allows you to determine which type you are facing. You need to know this because only then can you come to a solution ground.
The opposite of Insolvency
I know that this question has already flashed through your mind as you read the paragraphs above.
The opposite of insolvency is solvency and it a situation in which you are in possession of more assets than liabilities.
This is what it means in a simple and understandable manner.
Being solvent allows you to meet up to long-term debts and financial obligations with an air of ease and flexibility.
You may ask “Why is solvency important to me and my business?” and here is why.
Solvency is important because as a business owner it enables you to continue operating.
If your business doesn’t have assets to pay the bills it accumulates, then it won’t survive.
Strengthen your business life by keeping it solvent.
How to be free from insolvency starts with you maintaining this aspect of your personal and business life.
Practical Ways on How to Be Free from Insolvency
Freedom from insolvency can be breathtaking and it something you should be able to achieve. Here is a list of practical ways on how to be free from insolvency.
Analyze and find ways to improve your cash flow
Nobody is perfect in the financial world. Sometimes you could face losses and debts.
When faced with a situation of insolvency, you need to analyze your cash flow channels and look for ways to improve it.
Here you can look into your invoicing methods and see if they are up-to-date or not current.
Check if your debtors have paid off what they owe. After you are done with your analysis, improve upon your payment obligations by extending payment dates, and work on your credit limit.
Reduce any overheads
overheads are simply an expense incurred during the upkeep or running of a business.
This clearly is pointing out those areas that your business uses routinely.
This can be in the form of the staff you have, advertising expenditures, social media marketing, and PR.
You need to look into reducing the amounts of money spent in these areas.
Negotiate with your creditors
when you have noticed that you are insolvent, then you need to contact your creditors.
You need to do this because if you don’t the pressure of payment will be mounted upon you.
Doing this at an early stage allows your creditors to extend your payment date through active negotiation.
No one or a business is perfect and situations can come along the way.
Open a dialogue with your creditors as soon as possible and negotiate a new date to pay your bills.
Seek expert advice
seeking expert advice on how to be free from insolvency can be very beneficial to you.
Nothing is new under the sun, and this means that many people have walked the path you are currently on.
Having this in mind you can approach a financial expert with experience in the field.
Bringing such an individual on board allows them to analyze your business and give you the best solution.
Injection of Money into the business
This is done by injecting your personal money into your business. If your business has directors, then you could negotiate with them on putting in some money. This step can be risky as some directors will ask for exchange in the form of company shares.
Restructure your life and business
Most times your lifestyle might be one of the reasons why you are insolvent. One of the practical ways on how to be free from insolvency is to restructure your lifestyle.
This can entail how you spend money, and most importantly don’t buy what you don’t need.
In your business, restructuring involves looking at how much staffing you have, office premises, etc.
Having these in mind your mind helps you decide to reduce the staff you have, and only keep the ones that you can’t do without.
Tip: If you are managing a business, avoid selling on credit to any customer. This will help you stay afloat in your cash flow system.
What do I do if I am already in the midst of insolvency?
This is a question of high concern because many are already in such a situation and don’t know what to do.
Drawing from the practical ways on how to be free from insolvency mentioned above, I will point out key areas to focus on.
If you are already in the midst of insolvency, here are some tips you can follow:
- Cut down on your expenditures
- Analyze your cash-flow and find out what is consuming most of your income
- Stop anything that is unnecessarily consuming your income
- Create new and better channels of cash-flow
Frequently Asked Questions
Q: What does solvency mean?
A: Solvency, simply put, means a situation where you have more assets than liabilities.
Q: How is solvency calculated?
A: Solvency is calculated by calculating your business after-tax net operating income by your total debt obligation.
Q: When does a business become insolvent?
A: A business becomes insolvent when it has more liabilities than assets and they can’t pay their bills at the due date.