Insolvency

The condition (especially of a company) of not having enough money to pay debts, buy goods, etc., or an occasion when this happens [Cambridge Dictionary]. Before an insolvent company or person gets involved in insolvency proceedings, they will likely be involved in informal arrangements with creditors, such as setting up alternative payment arrangements. Insolvency can arise from poor cash management, a reduction in cash inflow, or increased expenses.Insolvency is a state of financial distress in which a business or person cannot pay their bills. It can lead to insolvency proceedings, in which legal action will be taken against the insolvent person or entity, and assets may be liquidated to pay off outstanding debts. Business owners may contact creditors directly and restructure debts into more manageable installments. Creditors are typically amenable to this approach because they desire repayment, even if the repayment is on a delayed schedule. If a business owner plans to restructure the company’s debt, they assemble a realistic plan showing how they can reduce company overhead and continue business operations. The owner creates a proposal detailing how the debt may be restructured using cost reductions or other support plans. The proposal shows creditors how the business may produce enough cash flow for profitable operations while paying its debts. Numerous factors can contribute to a person's or company’s insolvency. A company’s hiring of inadequate accounting or human resources management may contribute to insolvency. For example, the accounting manager may improperly create and follow the company’s budget, resulting in overspending. Expenses add up quickly when too much money flows out, and not enough is coming into the business [Investopedia].

Sources:

Insolvency. Cambridge Dictionary. Retrieved from: https://dictionary.cambridge.org/dictionary/english/insolvency

Tuovila, A. (2022). Insolvencies: Definition, how it works, and contributing factors. Investopedia. Retrieved from: https://www.investopedia.com/terms/i/insolvency.asp