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It may be a single trigger or a combination of events that leads to financial difficulty.
Frank Lo Pilato, Director and Managing Partner of RSM Canberra, drew on his decades of experience to share six common signs of insolvency and bankruptcy, along with why he believes you learn more by failure than victory.
Frank, who has been with the firm since 1991, was a talented rugby player in his youth, but found his ultimate career calling as a Registered Liquidator and Bankruptcy Trustee, helping people find solutions to complex financial challenges.
1. Cash flow dries up
Most of our insolvency clients have cash flow issues which leads to being unable to keep up-to-date with mandatory repayments, like the ATO and other creditors. A common warning sign is if you need to start paying creditors outside of trading terms.
If cash flow doesn’t improve and debt continue to mount, the situation typically gets worse, and quickly. That’s why we are encouraging people to speak to us early in the financial distress process.
If you are struggling to meet on-going business expenses, like repayments to the ATO, start the conversation sooner rather than later with a financial expert - it can help stop your debt levels spiraling out of control.
2. Your overdraft has reached its maximum
If you are facing cash flow challenges it can be a very confronting and overwhelming situation if you aren’t able to access more funds.
Often clients have made a bank application for more funds and it’s been rejected, or in a corporate matter, further investment funding has been sought out, but there hasn’t been any funds committed.
We work with people with very limited funds to understand their options and help get them the best result in a difficult situation - to make the limited resources available, go further.
3. Staff shortages and wage pressures
For particular sectors in Australia right now, including hospitality and construction, it’s a real challenge finding people to fill roles and this is leading to wage competition for workers too.
There are also staffing challenges being caused due to people having to go into isolation as a result of COVID-19. These factors can certainly contribute to financial distress for business owners.
The Australian Financial Review reported in February that a record 85 percent of Australian businesses that reported staff shortages are holding back their ability to operate at full capacity and capitalise on the $245 billion in household savings stashed away during the pandemic.
4. Supply chain issues
The global supply chain has been seriously impacted by the pandemic and this has triggered financial distress for some business owners, including SMEs.
Shortages and delays in the supply chain can also lead to price increases in some cases.
The supply chain issues are largely out of the hands of most business owners, yet many are feeling a significant financial impact as a result.
Honest and upfront conversations with an expert when these sorts of situations arise can help ease a stressful situation and potentially put some options on the table for consideration.
5. partnership disputes or illness
We know that running a business isn’t a walk in the park. Conflict over things like the business direction, investment strategies, and succession planning can lead to partnership disputes.
No one goes into business to intentionally end up in a dispute or financial distress - but it does happen sometimes.
Illness of a key member of the team, such as, the business owner can also sadly trigger financial distress. Sometimes major responsibilities are delegated to people who may not have the skills or understand the business operations.
The health of the person may be suffering, along with the long-term health of the business. It’s important to support people in these situations with professional, unemotive advice that can maximise their financial interests.
6. Natural disasters
Bushfires, floods, pandemics - all of these natural disasters are out of business owners’ control but can be triggers for financial distress - business projections go out the window.
Even businesses who have successfully been running for over 40 years and have needed to call on insolvency advice and support. Bankruptcy or insolvency can happen to anyone. It’s not something to be ashamed of, but it is definitely something you need to seek the right advice around.
You learn more from failure than victory. If you know there is a problem, be transparent about it as soon as possible. You don’t want your family, trusted suppliers, landlords, or business partners to say to you, "Why didn’t you tell me earlier?".