RSM Australia

Tips to avoid failure for small business - Part 1

Small business owners take note!
At RSM, we have seen many businesses with cash flow problems or debt recovery issues successfully turned around as a result of early action on the part of directors and business owners.  

Unfortunately, business failures usually occur where action is taken far too late to enable any chance of turnaround or restructuring. This can lead to the bankruptcy of the business.

In the first of a two part series, we provide some key advice to small business owners which can reduce the risk of business failure.

Did you know……… The Government has announced that it will allow the ATO to disclose tax debt information to credit reporting bureaus where the business meets all of the following:
- it has an ABN
- it has a tax debt of at least $10,000 that is overdue by more than 90 days
- It has not effectively engaged with the ATO to manage its tax debt

These measures are subject to the passage of law, however when implemented – have the potential to severely impact upon the credit rating of small businesses, and therefore their ability to obtain finance.


Do you have exposure to one or a few major customers?  What would happen if they can’t pay your bill? 

Some strategies to reduce the risk of bad debts:-

  • Be aware of how the client is paying. Are they paying within your terms? Are they paying with debt factored finance as this can be an indicator of cash flow problems.
  • Keep in touch with your customers – close contact can provide good and timely information on their circumstances. Are they giving excuses for non-payment, such as my customers haven’t paid me? Again, this can be an indicator of cash flow problems or even insolvency.Are you protected against risks of supplying to small business?
  • Have your customer’s cheques bounced? Yet another indicator of cash flow problems.
  • Don’t’ be fooled by a flashy exterior – flash cars, premises etc. – flashiness does not necessarily equate to solvency.
  • Keep a close eye on your debtors’ ledger and any debts which are outside your terms – take early action to limit credit to customers who aren’t paying within your terms.
  • Where possible, spread your risk – the more customers you have, the less risk to you if one of your customers fails.
  • If you are supplying goods, then ensure you have registered a PPSR – this is the only way you can recover goods if the customer’s business fails.
  • Ensure that you have a formal credit agreement, preferably containing a personal guarantee given by the business owner – that way if the business fails, you have some recourse to recover the debt from the owners personally.


Many businesses rely significantly on other business goods, to enable them to provide their own goods or services. What would happen if one of your key suppliers fails– will this impact upon your ability to deliver your own goods or services?
Tips to reduce the risk that you can’t deliver:-

  • Seek out alternative providers of your essential supplies
  • If you are in the building industry for example – do not place sole reliance on one subcontractor or supplier. If they can’t deliver – you will need other relationships to enable you to meet your own targets.


Many bankruptcies also occur as a result of bad luck such as illness, inability to work unexpectedly, but it is our experience that the majority are as a result of people living beyond their income or means, or the failure of small business or partnership businesses. The tips mentioned previously apply equally to partnership and sole trader business, however some additional factors which may impact on personal exposure relate to the role of guarantors of other people’s debts. 

Hot tips:-additional factors may impact personal exposure related to the role of guarantors of small business debts

  • Do not guarantee the debts of any other person unless you are fully aware of the limits of your potential liability if they do not pay – always read the fine print, or seek professional advice regarding your rights, obligations and potential exposure
  • What are you risking if you do guarantee the debts of another person? 
  • Have a written agreement in place in relation to any loans you make to any other person (including your family). 
  • Do not agree to be a Director of a Company, unless you intend to participate fully in the financial and business affairs. Ignorance is not a defence, and you may be personally liable for company debts in the event that it fails. 

For further information, please contact one of our Restructuring and Recovery specialists.

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David Kerr
Partner - Sydney
David Mutton
Partner - Melbourne
Jonathon Colbran
Partner - Canberra
Mitchell Herrett
Partner - Brisbane
Neil Cribb
Partner - Perth
Tim Gumbleton FCA
Principal - Mid-North Coast NSW