Struggling businesses have common warning signs, such as loss of a key account, rising debt and extended credit terms. If these are noted early enough, the businesses can be turned around, says insolvency specialist Garry Whimp.
But, he adds, "Even sound businesses struggle because of rapidly changing market conditions. Often, people have done little wrong but have been affected by key events such as the current credit crisis.
"Trading conditions may have completely changed since the businesses were started. It can be very, very difficult to adapt to changing conditions when a business lacks flexibility because of various fixed expenses, and companies which have one main client or product are more vulnerable than those with a diverse client base and product range."
He says it could also be very hard to make possibly painful changes that are necessary to halt a slide into insolvency in a family-owned business that employs family members.
Fundamentally sound companies could also fail in cases where the shareholders had "gone to war with each other", meaning the company could not find a clear way forward.
He recommends seeking advice earlier rather than later to reduce the risk of trading recklessly and the risk of financial loss to the creditors.
"A director has to be very aware that he or she will be held accountable if proper action is not taken at the date they knew - or should have known - that the company was insolvent.
"Directors face difficult decisions when their businesses face tough times. In many cases directors/shareholders have increased mortgages on their houses and advance further capital to take pressure off short-term cashflow.
"They must ask themselves, 'Are we paying our debts as they become due?' and 'How much is our survival at this point depending on injections of our own or someone else's cash?' They also need to establish their true profitability. Directors are sometimes shocked to realise how little they have been working for over an extended period. It's as simple as that."
He says there are "a lot of really good people out there trying to do as much as they can to resolve their problems but ... at a certain point liquidation comes as a huge relief to many people. Our advice to directors is, seek advice on your situation as soon as possible and, if necessary, make those hard calls".
Garry Whimp is the Northland consultant for Auckland-based insolvency & business recovery specialists McDonald Vague. He says he is happy to talk to directors of companies and their professional advisers seeking advice on the best way forward.