Don’t let insolvency sneak up on your business

The news of broadcaster Network Ten going into administration serves as a stark warning for all business owners to understand their finances and the warning signs that they may be headed for insolvency.

The ailing television broadcaster said in a statement on 14 June 2017 that it was left “with no choice but to appoint administrators” as its financial struggles reached an untenable level.

According to Peter Marsden, national head of restructuring and recovery at RSM Australia, many businesses – particularly SMEs – don’t understand the warning signs that a business is heading for insolvency, and that by the time they are aware, it is often too late to save the business.

“What you find is that those directors that act earlier tend to get a better result, because there is more flexibility with the value of assets and the size of liabilities, so there is a deal there to be done,” Mr Marsden tells My Business.

“A lot of it is dependent on the underlying business as to whether it is either profitable in its own right and is merely bogged down by an enormous amount of bank debt, or it can readily be made to be more profitable because there are circumstances within it that can be undertaken relatively quickly to prevent it from incurring ongoing losses.”

Mr Marsden also suggests that many SMEs shut down an ailing business prematurely because they don’t fully understand the role of voluntary administration and its ability to restructure a business.

What are the warning signs that a business is headed for insolvency?

“Invariably it comes down to cash flow, and you can usually start to identify from your cash flow and the level of creditors,” Mr Marsden explains.

“If you’re doing proper accounts every month, you’ll get a list of your creditors – if you start to see your creditors blowing out from traditionally being 30 days to 60, to 90 [days], you’re starting to see some problems with your cash flow and your ability to repay your creditors.”

Another warning sign, says Mr Marsden, is a regular inability to make statutory payments on time.

“Look at your statutory payments in particular, the debts to the ATO – if you’re starting to get to a position where you can’t pay it every month, the warning signs should be flashing in front of you to say, ‘I need to stop and have a look and get some good advice around this to see what the issues are that are causing that to be the case’,” he says.

What can be done to save a struggling business?

The first step, according to Mr Marsden, is to speak with your accountant.

“Often your accountant is the very best place to start – they can help you with the fundamentals to help you identify what the issues are, do a budget, do a projected cash flow, sit down and look at what it looks like going forward,” he says.

This can help to identify the root causes of the business’ problems from where you can look at both formal options – including voluntary administration or liquidation – as well as informal options.

“[For example], if you have one particularly big creditor, do you go to them and say, ‘Look, we’re having a bit of a cash flow problem, Can I take you out of being a 14-day account and pay you $5,000, $10,000, $15,000 a month (whatever that number needs to be) over the next six months while we catch up and make it work’, instead of having to jump over this really big debt,” says Mr Marsden.

It comes after accountant Tracey Loubser blasted SME owners for having poor year-end self-assessment processes, which she argues can leave them and their employees with a false sense of achievement and safety.

 

Related Articles

promoted stories