Running a small business can be tough going, especially when there is a downturn in the economy. The bills can pile up and business can be slow.
For some business owners, there can be a niggling fear that their company may go into liquidation. Often, they don’t seek help until the inevitable is, well, inevitable.
And it’s not an unfounded fear these days, with retailers experiencing the worst sales conditions in years due to wage stagnation, tightened lending criteria (post-banking royal commission) and a general consumer reluctance to spend money.
It’s not just the retail sector that is hurting. According to figures from the Australian Securities and Investments Commission, 556 construction companies went under in the 2018-19 financial year — an increase of more than 100 on the previous period.
In November, the Reserve Bank noted employment fell by 19,000, the largest one-month drop in over three years. Unemployment rose to 5.3%. Meanwhile, ASIC reported there were 8202 business insolvencies in 2017-18, with 78% of those businesses employing fewer than 20 people.
In short, softening economic factors are touching numerous industry sectors, and no company is immune to financial strife.
As an insolvency practitioner, I often face the task of liquidating companies, and in many cases, I have thought we could have turned them around and kept them trading if they had sought professional help sooner.
There are other options beyond the finality of liquidation for companies doing it tough. Still, they need to see the warning signs early enough to access professional help before it is too late.
Professional intervention can result in a much-needed restructuring of the business, which could allow you to continue operating.
One option might be voluntary administration, which can pause creditor demands, while administrators look into your business, followed by a subsequent deed of company arrangement (DOCA). A DOCA is an agreement with creditors that often allows you to continue operating.
The big question is: how soon should you seek professional help? And how do you know when your business needs it? I have compiled a list of the top eight warning signs your business may be in trouble.
Not all of these mean you need help, but when you start to see a number of them in your company, or if you find the list resonates with your current situation, get in touch with a professional administration or insolvency adviser as soon as possible.
1. Loss of major clients or accounts
Many companies experience the blow of losing significant clients, but they need to try and replace them as soon as possible to keep cash flowing in. An ongoing decline in sales as a result of some major client or customer losses is a clear sign you should be considering a company restructure.
2. Loss of key personnel
If your best and brightest employees is leaving, you face the task of finding replacements, retraining them, and building the business back up. When staff departures are not just a one-off event, consider it a ‘canary in the coal mine’ sign. Why are they leaving, and what is happening within your business that you need to address?
3. Reduced competitiveness
If you are no longer competitively placed within your sector and increasingly being pipped at the post by your business rivals, then use the opportunity to rethink your business model. Your company growth may be stagnant and affected by poor management decisions.
While reduced competitiveness alone may not signal to call in a business advisor, it is an early warning sign that your business trajectory may be going south.
4. Shortage of cashflow
Unsurprisingly this is very common, particularly for small businesses for several reasons. Late payments from clients and customers (usually big companies), coupled with tightened lending criteria, makes it difficult for small businesses to access ready cash. ASIC’s annual report into corporate insolvency reveals other contributors for cashflow issues include non-payment of statutory debts such as GST (77.1% of cases); difficulties paying other debts when they were due (50.3%); and a shortage of working capital or unprofitable trading (53.5%).
As of July 1, 2019, single touch payroll (STP) also became compulsory for all Australian employers. There is no doubt this has increased pressure for small businesses with the Australian Taxation Office having real-time access to your data around wages, allowances, deductions, Pay-As-You-Go withholding and superannuation payable. In short, the tax office can now identify and recover debt much faster, in real-time.
5. Escalating expenses
If you are spending money faster than you are making it, or spending more than you make, it’s time to trim the fat and get rid of expenses that are not vital.
Be brave about it. There’s no use trimming expenses in all areas of the business to be ‘equitable’. If some areas have more unnecessary expenses than others, be brave and slash harder there, allowing the more profitable, high performing cost centres to retain the tools they need. If you are still spending more than you make, and can’t trim any more, it’s time to speak to someone.
6. Debt dependence
If most of your revenue is going towards servicing debt, your business growth will be constrained and you might find yourself in a debt spiral. You cannot reinvest into the business and scale because you continuously need to focus on repaying your borrowings.
7. Trading while insolvent
If your liabilities (or debts) are more than the value of your assets (including money in the bank), then you are classed as ‘trading while insolvent’.
Trading while insolvent is illegal in Australia. If you are trading while insolvent, then things are dire and you should involve a professional as soon as possible. The good news is that an insolvent company can be restructured and be rebuilt, but you should seek help quickly before things get any worse.
8. Inadequate accounting processes
No matter the size of your business, you must have a handle on your profit and loss, and understand your balance sheet. If accounting is not a strength, then investing in a good accountant or bookkeeper should be a priority. Look for one who understands your vision and preferred reporting style. Only by being on top of your finances can you quickly identify any issues.
With the economic climate the way it is, I expect to see more companies going into liquidation. However, I think with early intervention, and sound business advice, there’s a chance many companies can be turned around before it gets that far. They just need to see the warning signs early enough to get much needed financial advice.