Insolvency Analysis for Houston Businesses
Insolvency analysis services leverage forensic accounting techniques to determine whether a business is able to meet its financial obligations. There are a few definitions of insolvency, but the Uniform Commercial Code’s (UCC) definition is the important one, as the UCC outlines commercial law at the federal level. According to the UCC, an insolvent business is one that:
- Is unable to pay its debts (generally speaking) as a product of its typical business operations – outside of formal disputes.
- Is unable to pay its debts as they come due.
- Is considered insolvent under the definition of bankruptcy law.
If any of the above are true about a company, it is considered insolvent and will need to take steps to prevent bankruptcy and liquidation. However, it can be difficult to determine when a business has become insolvent, given the amount of financial information involved and the inherent subjectivity in assessing it. This is where insolvency analysis from forensic accounting services can provide an expert assessment.
How Forensic Accounting Experts Conduct Insolvency Analysis for Houston Businesses
Forensic accounting services are the experts in insolvency evaluation and can identify when their clients have debt or tax-related problems. During your consultation these experts will determine how to assess your company’s solvency, which typically means one of the following two forms of financial analysis:
- Accounting insolvency – One of two primary assessment models check for accounting insolvency by evaluating the value of its assets versus its liabilities. During this form of insolvency analysis, the value of liquid cash (and its equivalents), accounts receivable, inventory, real properties (land and buildings), equipment, investments and various intangible assets, such as the value of any intellectual property will be assessed. This is compared to the company’s liabilities, which include accounts payable, rent, capital expenses, shareholder equity and the cost of any long-term debt servicing and interest.
If the value of the company’s assets is less than its liabilities, this is known as accounting or balance sheet insolvency and is generally more difficult to resolve. It’s also more likely to lead to bankruptcy and asset liquidation, so corrective measures are recommended, and the sooner the better. - Cash flow insolvency – When a company’s cash flows are not sufficient to meet its debt obligations, this is termed cash flow insolvency. Our forensic accounting experts will evaluate the company’s cash flow statements to identify if cash flows aren’t enough to cover the debts of the business. If necessary, we can perform cash flow analysis using other financial documentation to quantify cash flowing in and out of an organization.
In many cases, it’s easier to find a resolution to cash flow insolvency before bankruptcy is recommended. This could be as simple as reorganizing invoicing procedures to ensure accounts receivable are paid on time, or as complex as evaluating the company’s financial planning or purchasing patterns for recovery.
How Can Insolvency Analysis Services Help a Struggling Business?
Most businesses do not survive the five-year mark, and only about 30 percent survive for 10 years. Many of these businesses are undermined by insolvency issues that could be addressed if identified early enough. If your company is also struggling with debt and financial distress, here’s how a forensic accounting expert and an insolvency evaluation can help:
- Determining the extent and nature of the problem – An insolvency assessment is effective at determining whether a company’s insolvency issues are due to insufficient assets, insufficient cash flow, excessive expenses, poor inventory management, poor tax planning or a number of other issues. During insolvency analysis, accounting professionals can diagnose where the financial distress is originating from, so your organization can take effective measures right away.
- Prepare the business for bankruptcy and liquidation – If insolvency issues indicate that bankruptcy and liquidation are unavoidable, insolvency analysis can help determine the best approach to asset liquidation to ensure maximum cash recovery. This will put the company’s owners in the best possible position to pay back creditors and minimize the bankruptcy timeline.
- Help interested investors with due diligence – Before outside investors will contribute funding to the company, they will need to review the company’s financial statements and overall financial strength before committing. Insolvency analysis is a critical evaluation and due diligence tool in this regard and supports efforts to secure additional rounds of funding.
What Causes Businesses to Become Insolvent?
There are several common factors that tend to contribute to a company’s financial distress and eventual insolvency. They include:
- Cash flow problems – Cash flow mismanagement can lead to a mismatch between cash inflows and outflows. For instance, a business may invest heavily in production equipment, only to run short on cash when it can’t afford the personnel to operate that equipment.
- Poor operational processes – Companies that don’t have streamlined billing or accounting processes may find themselves perpetually behind on making debt payments, which leads to higher debt servicing charges in the future and make it difficult to access additional lines of credit. Inefficient processes can also cause a company to fall behind on resolving accounts receivable, delaying payment.
- Too much debt – Houston businesses need to borrow money occasionally to maintain operations, but when a company commits itself to too much debt, those obligations may exceed the company’s ability to generate income during the normal course of business.
- Rising operational costs – When the cost of labor or raw material increases, companies usually seek to recoup those costs by passing them on to consumers. However, this isn’t always possible, which eats into the bottom line of the business. Declining sales – often the result of rising input costs – are another contributor to solvency problems.
- Legal judgements – Lawsuits against the business are often expensive – both to pay out and to defend in court. Lawsuits may be filed by customers, employees, competitors and government agencies, so legal threats can arise from many directions at once.
Asset and even liability discovery is a necessary part in matters ranging from divorce, marriage, business transactions, litigation, and bankruptcy. For forensic accountants, assets and liabilities are regularly discovered through analysis of tax returns, bank statements, financial records, bookkeeping records, and even emails. The Evident Forensics team has the experience and knows how to analyze various data sources that document assets or liabilities.
Forensic accountants are experts at taking financial data and using it to discover additional assets or liabilities. This is valuable for pre or post-nuptial agreements, marriage dissolution, due diligence and bankruptcy proceedings. Asset and liability discovery is also necessary for determining the boundary between community and personal property.
In short, we can provide a complete picture of all assets and liabilities for all parties involved.
Forensic Accounting Experts Can Provide Expert Insolvency Analysis Services
If your company is experiencing ongoing financial distress, or you need to perform due diligence for a business you’re considering investing in, insolvency analysis services can provide valuable information. It’s often difficult to determine when a particular company has entered the zone of insolvency, unless a deeper evaluation is performed.
Forensic accounting services are experts in this form of analysis, as they can develop detailed financial records using their client’s information, accurately evaluate assets, and identify what insolvency issues are affecting a Houston company. This can provide clear guidance on future operational decisions and how to restore financial stability to the organization.
