How do I tell if my business is actually insolvent or just having a bad quarter?

Distinguishing between temporary financial difficulty and genuine insolvency is crucial for directors. UK insolvency law provides two formal tests. The cashflow test asks whether your company can pay its debts as they fall due—if you're consistently missing payment deadlines, juggling creditors, or relying on emergency borrowing just to cover basic expenses, this suggests insolvency rather than a temporary downturn. The balance sheet test examines whether your total liabilities exceed total assets—if your debts outweigh everything the company owns, you're technically insolvent even if cash is flowing today. A bad quarter typically shows declining sales or profits but you still meet obligations on time, creditors aren't threatening legal action, and you have access to working capital. Insolvency, by contrast, means you cannot pay bills when due, suppliers have stopped extending credit, HMRC is chasing arrears, and your bank has withdrawn facilities or refused further lending. Ask yourself honestly: if I sold everything the company owns tomorrow, would it cover all debts? Can I confidently pay next month's wages and rent? Are creditors becoming increasingly aggressive? If you're unsure, seek professional advice immediately because the longer you wait, the fewer options remain. Directors who convince themselves 'it's just a bad patch' when insolvency is obvious risk wrongful trading claims. The test isn't whether you hope things will improve, but whether there's a realistic, evidence-based prospect of avoiding insolvency. Professional insolvency practitioners can provide objective assessments and help you understand whether your concerns are justified or whether restructuring and negotiation can stabilize the position.