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Top 5 warning signs of business failure

Top 5 warning signs of business failure

When financial pressure is mounting, a company director has a lot of noise to deal with. In this situation, a small business owner can become blinkered and miss the obvious warning signs in front of them. The ability to identify, and act on warning signs can help a business owner manage – and potentially reverse – the decline of their business.

With corporate insolvencies on the rise (ASIC reports 8.4% of companies entering external administration in June 2016), it is a timely reminder for company directors to be acutely aware of their current financial circumstances so as not to become an insolvency statistic themselves.

Here are our top 5 warning signs of business failure.

1. Accumulating tax debt

When cash flow is tight, with essential suppliers, employees and landlords needing to be paid, the ATO can be left unpaid.  A small business owner may see this as a temporary measure with the best of intentions to catch up later. However, if successive BAS returns are not paid, the debt to the ATO can quickly balloon. If left too long, this can lead to the ATO debt becoming insurmountable and the small business owner having no hope of recovery.

2. Poor management reporting systems

Where basic management reporting systems are lacking, a director will typically run the business from the top line, meaning that he or she will judge success through the level of sales and the balance of the bank account.  What then often happens is that by the time the director realises sales have declined or there is insufficient money in the bank account to pay the next week’s wages, trading losses have been incurred and liabilities accumulated on a scale that is not recoverable.  In other words, it is too late.

3. Ageing of creditors on the rise

When cash flow permits, a small business owner will typically pay its creditors in the month following receipt of the invoice. The aged creditors’ ledger therefore looks ‘clean’ with the majority of outstanding debts sitting in the current or 30 day column of the ledger at any point in time.  When cash flow becomes tight, payments to creditors are pushed outside of credit terms and ‘bracket creep’ starts to occur. Each industry has its own benchmark for typical payment terms, however, when the percentage of debts in the 60 and 90 day columns of the aged payables ledger starts to exceed 50% of the small business owner‘s total debts, trouble is not far away.

4. Bank facilities fully drawn

A company will utilise a bank overdraft facility for working capital to meet day-to-day operating expenses. Typically the balance of the overdraft will rise and fall with the cycle of debt collection and creditor payments. However, where a company’s overdraft is consistently at its limit, this demonstrates a ‘hand to mouth’ existence that is not sustainable.

5. The small things are overlooked

Under stress, a small business owner will start to overlook the small things. The shop front or business premises may not be kept clean and tidy, shelves are not restocked, paper work is not filed, bins are not emptied and internal communication ceases. These actions, or lack thereof, may not be deliberate, but are a sure sign that the business is on the decline.

By recognising one or more of these signs early, a small business owner can seek appropriate professional advice that will allow them to address the problems and improve their business affairs to avoid becoming another insolvency statistic. If left too late, the only options remaining for the small business owner may be terminal.

Stephen James
Stephen James is the director of our Adelaide office. Stephen has over 17 years of corporate reconstruction and insolvency experience. He is involved in a wide range of insolvency trading engagements and complex insolvency litigation cases that have been successfully resolved.Stephen specialise in insolvency issues affecting the SME market.You can connect with Stephen via LinkedIn as Stephen James, BCR Advisory (SA).