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Is your business on a path to insolvency?
Every business has its ups and downs, but how do you know when a downturn may actually signal the beginning of the end?
If your business is having financial difficulties, you’re likely well aware of them. Your days and weeks may consist of alternating bouts of panic and then optimism as you convince yourself that everything will turn out fine.
While there’s certainly no harm in optimism, it’s not uncommon for passionate business owners to spend more time engaging in it than perhaps is wise. Every moment spent in false hope is a moment that could be spent on proactive financial and strategic activities that might ultimately:
- Save your business
- Protect your personal wealth
- Safeguard your reputation and future prospects
So instead of assuring yourself that the next big order is around the corner, or the tax office will suddenly forget all about you, it can be liberating to courageously step up and accept everything for how it is…before you create a plan to change it.
Six signs your business is headed for insolvency
There is a difference between a temporary lull in cash flow and being on a path to insolvency. If you’re unsure, here are six signs that your business may be on that path:
- Cash flow is always tight. You frequently can’t pay suppliers on time and often seek short-term lending options.
- Your accounts are overdrawn, and unpaid invoices are piling up.
- Banks or investors won’t lend you money, and they’re becoming more assertive about repayments on what you already owe.
- Business revenue is unstable, and you’re making minimal profits without a realistic plan to reverse the trend.
- Debt is essentially keeping your business afloat. You keep refinancing and may already be using high-risk lenders.
- Your business has a mounting tax debt and no viable way to pay it off.
You won’t find ‘Can’t pay superannuation entitlements or staff wages on time’ in the above, as this is a definite sign that the business is already insolvent. If this is the case for you, it’s important to get advice as soon as possible.
For business owners who identify with at least some of the above signs, it’s worth getting advice as soon as possible. Reaching the point of insolvent trading carries a much greater risk to your personal finances and future prospects, and taking action to avoid that could be the best decision you make.
This doesn’t just apply to directors who are business owners, but directors in any capacity, including those on non-profit boards (even if it’s just for your local sports club). If the organisation trades while insolvent, there can be financial and legal repercussions for all board members.
Charting a new path
The first step to chart a path away from or through insolvency is to get external advice. Any successful business owner will tell you that surrounding themselves with experts who can see or do what they cannot is key to success.
Because insolvency is a financial issue, it makes sense to engage business advisers who are financial specialists. They will be able to do things like:
- Conduct a thorough cash flow audit
- Review your business and pricing strategy
- Suggest business improvements
- Liaise with the tax office on your behalf
- Restructure debt
Working with a suitably qualified adviser is also one of the conditions for accessing Safe Harbour, which can provide protection against insolvent trading claims that would otherwise expose you to personal liability.
Where the financial issues are stemming from an unprofitable segment of your business, your adviser may help you dispose of it or bolt something on to turn it around.
Where the issue relates to partnership or family business disputes, including succession planning, the right adviser will be able to assist with mediation. For example, our business advisers will often hold mediation sessions between directors or families where a lack of clarity is weakening their business.
For tax issues, such as a DPN notice, your adviser may be able to assist with solutions such as repayment negotiations or Small Business Restructuring.
Experienced advisers will usually also have a large network, and may be able to connect you with other funding options, or even prospects for a merger or acquisition if that is your goal.
The point is that all of these options and potentially many more are on the table when you seek advice and support early on. Initial consults are always free and have no obligation – they’re simply a way to have a confidential chat about what’s happening for you and what the adviser believes may need to be done to move forward. We have seen instances where directors have come in thinking it’s all over, only to find solutions that have enabled them to exit their business with a profit.
You never know what's possible. To organise a free, no obligation, confidential discussion about your business, please get in touch with your local RSM office.
