For most businesses, there will be times when finances (particularly cash flow) become a problem. But rather than ask for professional advice, a lot of business owners ignore the problem until it’s too late.
It helps to know the early warning signs of insolvency so that you can take action and avert a real crisis.
That’s what this article is about – with nine signs you can use as a checklist for your business, if you are experiencing serious financial problems.
Why do people ignore the early warning signs of insolvency?
In our experience, there are three main reasons why business owners ignore the early warning signs of insolvency. These are:
- They don’t think there is a problem; or
- They do think there is a problem but hope things will just get better; or
- They know there is a problem but don’t want to face up to it.
Financial problems can seem insurmountable at times. But putting off getting financial assistance from a professional can ultimately lead to the failure of a business.
So how do you know when your business might be in financial trouble?
The nine early warning signs of insolvency
Here are nine early warning signs which may indicate you need professional insolvency advice.
1. You can’t meet your upcoming BAS or superannuation payments
While it’s important to pay all your debts, it’s essential that you pay superannuation and PAYG Tax. If you don’t, you may receive a Director Penalty Notice from the ATO that could make you personally liable for these debts. Worse still, if you don’t lodge BAS or Superannuation Guarantee Charge statements within three months of them being due, you will automatically become personally liable for the PAYG Tax and superannuation subject to these lodgements.
2. You’ve failed more than one ATO payment arrangement in a short period
Obtaining a payment arrangement with your creditors, especially the ATO, may seem like a great way to ease financial pressure on your business. But, if you fail to comply with an agreed arrangement, then there’s a possibility that your business is already insolvent.
3. You don’t have enough funds available to pay all of your creditors
If you are struggling to pay all of your creditors within their required payment terms, it may also be an early warning sign of insolvency. This may especially be the case if you have been struggling to pay all creditors for more than just a short period of time – and there doesn’t appear to be any prospects of things picking up.
4. You’re getting constant reminders or demands for payment from your creditors
If your creditors are constantly following you up for payment or, worse still, you are getting letters of demand from creditors or their agents, this is a strong indicator that things aren’t going well and you need insolvency advice.
5. You need to lend your company money to meet amounts owed to creditors
If you constantly need to lend money to your company so that it has funds available to keep trading, this can be a sign that financial problems exist. Bear in mind that if your company does ultimately fail, you may not recover all amounts that you have lent to it. Also, on a side note: if you are considering making a loan to your company, see a solicitor to get a loan agreement drawn up that makes you a secured creditor; and register a PPSR security interest.
6. Your business records are a mess
Another possible early warning sign of insolvency is if your business records are a mess and/or you cannot prepare accurate financial statements. You may wish to talk to your accountant about getting things in order but, if any of the other warning signs in this article also apply to you, obtain advice from an insolvency professional.
7. You keep making losses
Making a loss for one quarter or even one year may not mean a business is facing insolvency. However, a significant yearly loss or continuing losses with no improvement in sight is a strong indicator of financial problems.
8. Your net current assets are less than your current liabilities
If a business has more current liabilities than assets, it may be a warning sign of insolvency. This may especially be the case if the business looks like it will make future trading losses, as these losses will only make its position worse.
9. Your bank has reduced your credit limit or refused to lend more funds
A poor or deteriorating relationship with your bank can be an indicator of insolvency. Your bank will have its own way of assessing your business’s profitability and viability. Therefore, it may see the early warning signs of financial problems before you do. If you are having problems dealing with your bank, this can be a sign that you need professional advice.
Get early insolvency advice
Getting professional insolvency advice as soon as you realise there’s a problem will give your business the best chance of surviving its challenges and avoiding liquidation.
Just because your business is in financial difficulty doesn’t mean that it will have to go into liquidation, but if you don’t seek professional advice, it can turn out that way.
Experiencing financial difficulty?
Ignoring financial problems won’t make them go away.
If you fear that one or more of the above early warning signs of insolvency apply to you, we can help.
This applies whether it’s providing turnaround advice, negotiating a payment arrangement with the ATO or seeking settlement arrangements with landlords, shareholders and creditors for the best solution for all parties.
Get in touch with us now and let’s find a solution that works for your business and all other parties concerned.
