As one would do with a health situation, identifying the early symptoms of potential insolvency and acting before they become a serious illness is essential to avoid consequences that could be disastrous for a business and its stakeholders.
With the approval of the Guatemalan Insolvency Law[1] in 2022, the country has taken an important step towards enabling a company to reorganize and continue operating in the face of a challenging financial situation, protecting its value. This legislation balances the rights of creditors and the needs of debtors in these types of situations, and regulates everything related to bankruptcy proceedings, the state of insolvency of debtors, the order of priority of credits and their liquidation, among other aspects.
To date, the authorities are still working on the regulations that will make this law operational, and that will provide more certainty and tools to entrepreneurs, investors, and others affected by an insolvency proceeding.
Beyond the options that companies may have under the law in the event of an insolvency, it is best to identify risks so that they can be managed, and to anticipate the main alerts that should be monitored to prevent or mitigate such a situation in their businesses.
Based on the experience of our insolvency and asset recovery team, some of the warning signs to look out for are
- Changes in liquidity.
- Prolonged decrease in income.
- Lack of control over the relationship between total costs and expenses with respect to income from sales of goods or services.
- Increase in debt levels.
- Increase in collectible accounts.
- Loss of trust by creditors.
- Lack of innovation in the face of market changes.
Importance of Acting
If you detect any of these signs, do not ignore them. The longer you wait before you act, the higher the risk of facing a critical situation where the financial outlook becomes possibly unmanageable.
Resolution prevention, dealing with the early signs of insolvency, and capable leadership will be fundamental to preserving financial and operational stability and ensuring business continuity. To this end, we recommend:
- Form a team with the technical skills necessary to develop a plan to restore financial and operational stability to the business.
- Constant monitoring of cash flow. This includes reviewing financial management systems to identify liquidity mismatches and anticipate cash needs.
- Seek to diversify income to reduce dependence on a single customer or sector. This will mitigate market-related risks.
- Maintain strict cost control, verifying results through periodic reviews and audits. This will also make the operation more efficient and eliminate unnecessary expenses.
- If necessary, review and renegotiate contracts and commitments made by the company, to achieve more favorable conditions that will help meet the financial goals set.
In cases where the situation has already become more complicated, and you need to react, it is essential to act quickly and:
- Develop debt restructuring plans. These will include negotiating with creditors to establish payment plans that are sustainable for the company.
- Implement an internal reorganization strategy, including identifying inefficient areas for adjustments to the organizational structure.
- Consider selling non-core assets.
- Seek specialized commercial, financial and legal advice to participate in the design and implementation of a comprehensive recovery, reorganization and response plan.
You can deal with insolvency effectively if action is taken in time. If any of these signs have raised a red flag for your business, do not hesitate to contact us. We will be happy to answer your questions or provide advice.
[1] Decree 8-2022 of the Congress of the Republic