4 Tips for Understanding the Difference between Insolvency and Bankruptcy

Insolvency and bankruptcy are two entirely different things although the two are often confused. Insolvency is a state in which a business no longer has the means of paying debts on time. This occurs whenever liability or debt exceeds the company’s revenue or cash flow. Once a company is deemed insolvent, immediate action must be taken in order to settle or negotiate debts. Not effectively solving insolvency can lead to bankruptcy or a liquidation of all assets. Because insolvency and bankruptcy are often confused, it is helpful to know the differences in the two.

  1. Insolvency is defined as the inability to meet current financial obligations. In other words, your company is not currently making enough money to pay your debts. This can occur at any time if your business revenue falls below what you require to keep debts paid on time. Bankruptcy is often the end result of insolvency and involves liquidating assets in order to pay debtors. In some cases and depending on the type of bankruptcy filed, the business itself may not be required to pay the debts off but will likely end up closing due to lack of assets.
  2. Creditors have the ability to invoke additional rights if a business becomes insolvent. During a bankruptcy however, creditor rights are limited. Once your company is declared bankrupt you receive a bit of protection from your creditors. In the case of insolvency however, you have no such protection and creditors are legally allowed to collect their debts using a number of different means.
  3. Companies that become insolvent actually have a way out. Bonds can be sold that will help to raise needed cash to pay debtors. Once a business enters into a bankruptcy however, this leeway is no longer an option. If you are forced to file bankruptcy on your business you will have to follow through with the bankruptcy. Becoming insolvent can be turned around by simply accumulating more cash.
  4. Companies that are insolvent may be forced to become bankrupt or go into receivership. In some cases, you may be forced to liquidate assets in order to pay debts. Once you have found yourself insolvent you have a number of decisions to make regarding the future of your business. You can choose to attempt to raise additional revenue to keep your debts paid or find ways of refinancing that debt to lower your payments and/or bring your accounts current. Bankruptcy is normally the last result for small business owners who are insolvent and cannot find a way to bring their debts current.

Businesses can recover from insolvency and many have. There are a number of ways that you can raise capital to keep your business head above water while you build up customer bases and sales. Choosing to declare bankruptcy is a decision that should be considered carefully and again, this is often the last resort for small business owners. Understanding the differences between bankruptcy and insolvency is important as is choosing a qualified and experienced attorney should you decide that bankruptcy is in the best interest of your company.

Insolvency does not always lead to bankruptcy and all businesses that are insolvent are not bankrupt. However, all businesses that do file bankruptcy are considered to be insolvent because they have exhausted all means possible of paying debts and have found no viable solution for doing so.

About the Author: This article was written by Real Business Recovery, a team of award-winning insolvency practitioners specializing in Company Voluntary Arrangements or CVA. Visit us at http://www.realbusinessrecovery.co.uk for more information.

5 Budget Management Tips for the Small Business Owner

Running a small business means pushing your products and services against the odds created by big business and natural competition, making every dollar worth counting at every turn. Limiting overhead and increasing profits are mainstays for all businesses but their minute importance is even more pronounced for small businesses, with a single bill or lost sale potentially making the difference between success and failure.

If you’re a small business owner looking to exert greater control over your budget through new tools and ideas, consider these five budget management tips for small business owners:

1. Separate Personal and Business Finances

Separate Personal and Business Finances

Keeping the money you use for home expenses separate from that intended for business is an absolute must for long-term success. Good accounting entails knowing exactly where expenses and profits belong and mixing these different financial areas, whether on paper or only in your mind, has the potential to lead to disaster.

2. Maintain Six Months of Expenses

Maintain Six Months of Expenses

While often easier said than done, having ample cash to fall back on is of absolute importance if you intend to see your small business to long-term success. Even the most well-thought out startups require time and patience to turn a profit and having money put away for both personal and business expenses to help you through the initial tight stages will help both you and your business to remain viable from opening day onward.

3. Become a Professional Accountant

What better way is there to manage your finances accurately than by becoming a professional yourself? Small business owners in the United States are able to study for and complete the Uniform Certified Public Accountant Examination at any time, giving you the cutting-edge knowledge and tools required to take full, hands-on control over your finances, both personal and business. You’ll need to pass cpa exams in order to do that though.

4. Take Your Taxes Seriously!

Take Your Taxes Seriously!

Whether you take our advice above to consider becoming a certified public accountant or you hire an outside professional to manage your finances, be sure to take your tax returns very seriously. This challenging requirement of being self-employed is more complicated than seemingly endless tax returns; polls show that one of the biggest tax problems faced by small business owners is failure to submit returns at all. The most cited reason for non-submitted taxes is a failure by the business owner to save taxes owed throughout the year only to balk at the total amount when that lack of financial management makes paying a tax bill impossible. To avoid such problems, always be sure to calculate the taxes and other government premiums owed on a regular basis throughout the year, maintaining accounts to hold those funds until the time that they’re needed.

5. Reassess Your Finances Regularly

Reassess Your Finances Regularly

Too often small business owners find themselves needing to review their expenditures when financial difficulty presents itself, leaving months or even years of unnecessary spending in their wake. To avoid wasting even a single dollar on unneeded overhead, take the time to review the money you spend on maintaining your business and make decisions to reduce or even eliminate costs whenever possible, avoiding uncertainty in the future and helping your business to remain viable even during the tightest of times.


While small business management does present difficulties not typically found in the workforce, creating and sticking to a well-thought out plan is the key to maintaining your freedom from the daily grind, making it a more than worthwhile endeavor for any entrepreneur. Follow the tips laid out above, recognize and tackle the hurdles unique to your niche and give your small business your all in an effort to ensure the best possible chance of a successful financial future!

About the Author: Jessy is a small business owner working full-time in the Internet

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