Taking steps to help ensure your business is protected against failure is vitally important. The following warning signs should not be ignored.
The number of personal insolvencies relating to business causes, such as business failure and personal liability from a failed business, is on the rise, however business failure does not happen in a vacuum, there are clear indications that things may be awry well before any business collapses.
Recognising, and acting on, the warning signs early can help prevent business failure. There are a number of signs to be aware of, including:
Missed obligations
When a business is facing challenging times, it may be tempting to delay payments which do not impact the day to day operations, such as PAYG, GST or superannuation obligations.
However, even if revenue does not improve, the payments still need to be made.
Failure to remit PAYG and super to employees may also result in personal liability being imposed on company directors.
Trading losses
Although it may seem worthwhile to trade at a loss in the short term, in order to get the business up and running, ongoing trading losses erode the working capital of the business.
If trading losses continue for a number of months it is important to seek professional advice.
Poor records
It can seem like a time-consuming exercise, and take time away from revenue generating activities, but maintaining up to date financial records is important.
Without accurate data from management reports, cash flow statements, forecasts and business plans, it is difficult to make informed decisions about the direction of the company.
Maintaining good financial records allows a business owner to be able to identify issues, determine the extent of those issues and find appropriate solutions.
Cash flow management
Maintaining an ageing debtor ratio, recorded in days overdue, allows business owners to more accurately monitor how quickly accounts are being paid.
Strict policies and collection procedures should be in place to ensure maximum and efficient cash collection of debtors. This is essential for all businesses especially those in the expansion phase.
Cheques bouncing and dishonour fees may indicate poor cash flow management and inability to repay creditors on time.
Defaults on banking facilities and regularly being at the maximum limit of the overdraft facility may indicate cash flow deficiency. Using a personal credit card for payment of business expenses is also a red flag.
Payment terms rising
Delaying payments to creditors may seem like a good stop-gap action, but it can have a negative flow-on effect on business finances. If there is a history of delayed payments, suppliers may reduce trading terms or cash-on-delivery terms, which usually reflect their concerns about the ability of the business to pay invoices on time.
Only selectively paying some creditors over others or making payments outside of usual payment terms may be a sign of cash shortage. This is another red flag that business cash flow needs review.
Legal actions
Notices issued by creditors, suppliers or the ATO demanding payment or threating legal action is a serious red flag which if ignored may result in business failure. Debt and money owed will not go away if it is ignored, and a payment plan can be implemented with those that the business owes.
If your business is facing any of the above issues, it is important to be proactive in identifying the source of the problems and in taking action in a timely fashion to address them.
Caught early, and with professional advice, the chances of addressing these business issues, and protecting against business failure, is increased.
Ridhwaanah Iffat works with HLB Mann Judd Sydney, contact her for more information at riffat@hlbnsw.com.au
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