What is insolvency?

Insolvency - this is the state of the organization when it does not have the financial ability to pay off its payment obligations. The definition most specifically describes the concept itself and allows you to cover all the main types of this phenomenon. It should not be confused with bankruptcy. Insolvency is one of the prerequisites for declaring an organization bankrupt.

Reasons for insolvency

The size of the obligations taken determines the solvency of the organization. Such is considered a company that owns all assets and has no liabilities. Also solvent is a company that does not have its own capital, but repays all liabilities in a timely manner with the proceeds of the proceeds.

There are a number of reasons why an enterprise may become insolvent. Two main factors that can provoke this phenomenon can be distinguished.

Increase liabilities

The first factor leading to the insolvency of the debtor is an increase in the number of obligations. This is possible in the following cases:

1. Ineffective use of profit by the company.
2. Oversupply of the company. Storing too many of them is also costly.
3. Ineffective marketing, which leads to losses.

Insufficient profit growth

The second factor leading to insolvency is insufficient profit growth or its reduced pace. This occurs as a result of certain circumstances:

1. The fall in the market value of the product due to its inappropriate quality. This phenomenon is also called overstock.
2. Setting quotas or additional customs duties, as well as restrictions and sanctions.

Regardless of the reasons for the occurrence of insolvency, in the vast majority of cases, this is the result of ineffective and poor-quality management, the result of which is the deterioration of the company.

Types of insolvency

Insolvency is a common occurrence in the modern world. Specialists distinguish its various types:

1. Economic. It occurs when the company's income is below the average market level and cannot compensate for expenses. Funds for further functioning are taken from third-party sources, for example, from investors or banking institutions.
2. Business. In this case, the loss-making of the enterprise for creditors is due to the temporary cessation of the latter. At the same time, with the resumption of work, the company has a chance to return solvency.
3. Technical The company's liquidity becomes insufficient to cover all existing obligations.
4. Pre-bankrupt insolvency. It arises if the amount of debt becomes more than the value of all assets available in the company.
5. Legal bankruptcy. Officially recognized and documented by the relevant documents insolvency of the enterprise.

Signs of insolvency

Signs of impending bankruptcy are determined by obligations formed on the basis of the terms of contracts and relationships in the form of an oral agreement.

To do this, you can consider the elements of obligations:

• the amount of work performed and unpaid for the shipment of goods or the provision of services;
• inflated cost of work, which is considered as unjust enrichment;
• unpaid wages and social benefits;
• the number of non-repayable loans or credits, full or partial, including interest;
• debts to founders and other participants;
• property damage to the creditor.

Often the words "insolvency", "insolvency", "bankruptcy" are perceived as synonyms, which is fundamentally wrong. This creates certain difficulties in identifying these concepts. In the economic literature you can find such a term as “hidden bankruptcy”. It means that the value of the company has fallen, but does not indicate insolvency, and even more so the bankruptcy of the company in the generally accepted sense.

Insolvency rates

The main criterion by which the degree of insolvency is assessed is the time during which it is possible to eliminate this problem. The time indicator gives an idea of ​​its depth. This is the main criterion for insolvency. Based on this, five of its levels are distinguished. The time intervals in this case are set in accordance with the Law on Bankruptcy and determine its degree. Consider them in detail:

1. A nascent level. The company ceased to fulfill obligations more than three months ago. Such a delay is an occasion to initiate proceedings on the bankruptcy of the company.
2. Progressive level. Since the initiation of bankruptcy proceedings and for seven months, the company has been monitored.
3. Steady level. This is a period of stabilization. It has been ongoing for two years since the end of the monitoring and is called upon to rehabilitate the enterprise.
4. Chronic level. In this case, there are no strict deadlines. The duration of this period is determined by the duration of the settlement agreement, which can be concluded up to 25 years.
5. Absolute level. The company does not have any opportunity to restore its solvency, or the potential rehabilitation period is so long that it exceeds the maximum allowable term of a settlement.

Diagnostics of insolvency

There are certain methods and steps for diagnosing insolvency. These are the three main methods that are used in international practice:

1. Predicative. It consists in making an analytical forecast for the enterprise. Using this method, the company's management can assess the potential likelihood of bankruptcy and calculate the estimated profit of the enterprise in the future.
2. Normative. It is an analysis that is based on a comparison of real company performance with the projected.
3. Descriptive. It involves the analysis of company reporting from various points of view. Typically, this method is used in cases where third-party analysts are involved.

Analysis steps

The selected method of checking insolvency determines the method of analysis. The steps of the procedure, in turn, are the same for each method. The analysis procedure includes the following steps:

1. Determination of the focus of the crisis. To begin with, the volume of the problem and the source of its occurrence are established. If the problem is local in nature, eliminating it will not present any special difficulties, since, most likely, it will be caused by internal inconsistencies. If the financial position of the company is at risk, then most likely it is a question of the coincidence of various external factors.
2. Definition of criteria. At this stage, a decision is made about what indicators should be taken into account during the analysis, as well as the period for which data may be required. The depth of analysis and its accuracy is determined by the number of periods considered. However, carrying out such an analysis is more complicated and more time-consuming.
3. Distribution of responsibility. At this stage, the departments of the company that are in a crisis are determined.Responsible for troubleshooting are the heads of these units. In addition, an employee is selected who will be responsible for conducting the analysis.
4. The study of the environment. The most costly and time-consuming process. It requires an analysis of the external and internal environment of the company. The most appropriate is the use of a special SWOT analysis.
5. Findings. Analytical information is processed and submitted for discussion by a special council created in the company. As a result, the main tasks and directions are determined.
6. Event design. It consists in the choice of methods for overcoming a crisis situation.

Quite often, companies resort to the help of third-party specialists to analyze insolvency. These are various audit and marketing agencies. This is usually done in the absence of the required number of employees or their insufficient qualifications.