Is this business in trouble? Spotting danger on the horizon

Tom Lesnikowski, Associate Director

Accountants and bookkeepers often have the first opportunities to observe changes in a business, both positive and unfortunately negative. By getting involved with their clients through asking questions and testing their clients’ knowledge of the business and its key performance indicators, they can spot the danger signs that trouble is approaching or at hand.

Typically, it is not just one factor that points to a demise in a business, it is generally a culmination of factors, such as:

• A lack of working capital
• An overall asset deficiency
• The inability to meet financial obligations
• Creditors being paid outside of their trading terms
• The inability to raise further capital or obtain further borrowings
• Tight cash flow leading to juggling payments
• Making special arrangements with creditors or favouring certain creditors
• Overdue state and federal taxes
• Poorly maintained accounting records
• Rent not being paid on time
• Employees not being paid all their entitlements, particularly superannuation

The above are all internal factors. But what about external factors?

• Customers slowing down payments for goods and services provided by the business
• Increasing raw material costs and the inability to recover those increases
• Labour shortages and staff losses
• Competitors undercutting or setting unsustainable prices
• Customers seeking refunds or compensation for poor quality workmanship or services
• Transport and delivery delays – both goods inwards and outwards

The CPA Australia website hosts a danger signs cheat sheet to help Accountants and business owners spot the danger signs. One of the most important things is to not ignore or delay addressing any of the above factors. Acting quickly gives your client the opportunity to address and promptly deal with areas of concern and return the business to a stable and less unpredictable position.

To learn more about our corporate insolvency services or discuss options for your business, please contact our team.