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What is Insolvency?

Insolvency (Definition)

Insolvency is when a business (or person) is unable to pay their debts when they become due. It can be classified into two types – cash flow and balance sheet insolvency. Cash flow insolvency means a business has adequate assets to pay their debts but does not have the cash at hand to pay them. The cash flow test examines a business’ current liabilities, whether any debts will be paid off in future and when, current cash resources, and future earnings.

Balance sheet insolvency is when a business does not have the assets to pay off their debts. It is often followed by bankruptcy, though while they may not have the assets, they could have cash.

Indicators of insolvency include:

  • Ongoing losses
  • Low cash flow
  • Unpaid creditors
  • Overdue taxes
  • Inability to obtain finance
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