Helping individuals and companies that are in financial difficulties
An Insolvency Service case study

Page 3: Cash flow problems, consumer debt and insolvency

Cash flow

Cash flow problems are a major cause of insolvency. Cash flow planning involves making sure that a business generates enough cash at the right time to meet pressing liabilities.

For example, many manufacturing businesses have a cash cycle. They buy raw materials and parts on credit and then manufacture goods, which they store as stock. They then sell these goods on credit (funds, which may be due for payment in anything from 1-3 months time). In the meantime, they have overheads and a workforce to pay.

A problem for honest traders is that they expect credit customers to pay on time. This provides the cash to continue the credit cycle and to pay wages and other outstanding bills.

Unfortunately, the cycle often breaks down because creditors are slow to pay. This leaves the firm with a cash flow problem. Its bank may not be willing to help; this is where an insolvency practitioner or the Insolvency Service steps in.

Consumer debt and insolvency

Individuals can also be declared bankrupt. The majority of people who present their own bankruptcy petitions are not traders; they have not been involved in a business. It is very easy to borrow money, apply for credit cards and run up accounts with mail order catalogues.

For some, an event like the loss of their job or ill health, may mean they cannot meet their debts but others may simply borrow more than they can afford to repay. It may be easy to get credit but it always comes at a price.