What Does Insolvency Mean in Business?

The term ‘what does insolvency mean in business’ can be used to describe several financial situations, but in business, it typically means that a company is unable to pay its debts when they become due for payment. This can be because there is insufficient cash available to cover expenditure, or because the value of a company’s assets is lower than its outstanding debts. The two main types of insolvency are known as ’cash flow insolvency’ and ’balance sheet insolvency’.

Both can have serious consequences for a company, and it’s important to recognise the signs of insolvency as soon as possible so that steps can be taken to prevent further issues and to minimise the impact on creditors. Cash flow insolvency can be caused by factors such as excessive borrowing, overspending, or a lack of effective financial management.

Exploring the Meaning of Insolvency in Business Terms

Balance sheet insolvency is more serious and can occur when a company’s debts outweigh the value of its assets (both liquid and non-liquid). In this situation, the company will need to sell off its assets or enter into a formal debt agreement such as a Company Voluntary Arrangement (CVA) with creditors that enables it to continue trading while paying a reduced sum to its creditors over a set period. If this doesn’t work, the company will need to go into liquidation. This can be a distressing time for directors and staff, but it is not necessarily the end of the business, as there are many options for companies that are insolvent.