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A Guide on Reckless Trading 

A Guide on Reckless Trading

A company indulges in reckless trading when it enters into a transaction without passing the solvency test. A solvency test shows whether a company can pay its debts on time and whether the asset value is greater than the liabilities.

A company with more liabilities than assets cannot meet its creditor’s deadlines and is known to be insolvent. Reckless trading is punishable by corporate law, and the directors are also liable because they should be aware of the firm’s financial status.

Know the Company Requirements before Signing A Contract

The company directors must attest that the company can pass a solvency test. Passing the test is a way to prove to the creditors that they will pay timely. It also proves that the firm has more assets than liabilities. Legal action is taken if the company signs the transaction without passing the solvency test. Directors get audit committees to monitor the firm’s financial status to avoid this.

Some Warning Signs Your Company can Fail The Solvency Test

The company directors might get too held up in their everyday duties and fail to see signs of insolvency. Others ignore minor problems and assume it is cash flow and inefficient record keeping. Failing to give the problem attention could lead to more significant issues like insolvency. While managing the company, some of the insolvency signs to look out for in your firm are;

1. Maximum Borrowing

If the financial firms cannot give your company more loans with its assets as guarantees, it is most likely approaching insolvency. Also, suppliers could start denying you credit because you have been unable to meet the previous deadlines.

The worst happens when the cheques you issue creditors bounce. Some creditors are quick to take legal action, which could lead to auditing your company.

2. Demands For Payments

Your creditors demanding payments using the statutory demand is a bad sign. If the court audits the company and finds it insolvent, it is next to have it closed. Besides, other warning signs are if the company is taking longer than it does to pay creditors or late delivery of stock, reducing the production rate. The company should start cutting costs to afford to pay its creditors.

3. Delayed Wages For The Workers

A company with no money to pay wages is on the verge of being announced insolvent. Late paychecks could be sued by the workers, leading to heavy fines. Besides, if the court finds that not paying workers is due to insolvency, they will close the firm.

 How to Avoid Insolvency

A company’s insolvency can be traumatizing to the owner or directors. Luckily, these solutions ensure it passes the solvency test and does not indulge in reckless trading.

1. Give More Attention To Good Customers

Every business has different types of customers. While some pay you months after sending your invoice, others quickly meet their payment deadlines. Concentration on the more profitable customers will reduce the financial struggles, hence paying your suppliers on time.

2. Get Other Funding Options

If your business does not have good access to credit, move to a more prominent financial firm. You will be able to take bigger loans which is enough to pay wages, creditors and run the company. However, find other funding options if you have reached your borrowing limit.

3. Collect Your Debts

Some companies are declared insolvent because of debtors who don’t pay their bills on time. If you have customers whose debts are overdue, issue a reminder notice with a deadline for the payments? If the company fails to honor the reminder notice, get a debt collections company to help.

Taking action for debtors who don’t pay on time keeps them on their toes the next time they purchase items on credit. You can also limit the debts for individuals who do not pay on time.

4. Reduce Your Costs

Many companies get cash flow problems because of high spending. It leads to a lack of funds to pay bills and salaries and buy the required raw materials for production. However, if the company reduces its spending and saves more to settle creditors’ debts on time, they will be better.

Besides, reducing the cost of spending makes the company make more profits. This can lead to more growth for the firm.

5. Create Payment Terms

Creating payment terms in the company reduces the probability of suffering cash-flow problems. Some companies give the customers a grace period of 30 days to make their payments, while others extend it to 90 days. An easier way of getting paid instantly is giving discounts if the customer pays immediately.

 Bottom Line

As a company’s director, you should be aware of the consequences of reckless trading. Ignorance is no defense, and failure to follow the rules could make you suffer severe consequences. Ensure you check any signs of insolvency and apply the above tips to bring the company back to a better financial position.

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