I was recently reading an article in the Australian about the trends of revenue growth in Law firms, it’s not a section of the newspaper I read often but it had an interesting title “Minerals Boom Over”. What was interesting about the article was not that they were reporting that the revenue from the resources boom had diminished quite substantially in law firms, it was the fact that the trend for growth of revenue was in insolvency – with legal practises reporting that there was going to be significant growth in this area in the next few years.
That’s a sad trend report to read from my point of view. What this means is that there are going to be huge numbers of businesses being put into administration or being wound up. As an accountant that wants to see SME businesses succeed and NOT fail that’s depressing stats. When a business fails a ripple effect occurs – what I mean is that not only will the business owner and their family suffer but their clients, suppliers and their families, employees and their families that will be effected by this failure.
So what can the SME business owner do about it?
Businesses need to be aware ahead of time of what the rules are with regards to insolvent trading. There are quite strict rules around insolvent trading and most recently a director has gone to jail for doing so. Business owners need to know what their rights and responsibilities are. Plus new laws passed recently and from the 1 July 2012, a director can be made personally liable for their company’s unpaid ATO debts. It’s interesting to note that many businesses have been wound up by the ATO, as the ATO has definitely ramped up their collection of tax debts. ASIC has even released a program called the national insolvent trading program which is a focused approach to dealing with possible insolvent trading before it occurs.
The ATO have also just released a guide on tax compliance for the SME market and High wealth individuals listing out what raises a red flag for them. All businesses should be aware this guide because when the ATO releases a guide like this the ATO expects that taxpayers are actively interested in understanding their tax affairs and whether or not they have been too risky in their business.
Once you are aware, then the next step is to look out for the signs and seek some advice on what you could do to turn your business around. A lot of businesses at times have traded insolvent, however certain measures like an injection of cash, slicing your expenses, restructuring even as simple as having a business plan can make a big difference. I meet many many businesses that don’t have a plan nor do a profit and loss budget and you wonder why they would not have planned for the most important asset and income generating vehicle in their lives. It must be noted that insolvent trading could be just for a short period should there be cash flow issues or a natural disaster, which is sometimes inevitable. A lot of businesses have traded at losses before the big profits come. However this should be looked at with caution and only after advice has been given by your business advisor and with a plan.
So what are the signs?
Here is a quick list of a few signs that a business may be struggling and where advice should be sought quickly:
- Has your business had ongoing losses?
- Are you struggling with cash flow?
- Have you never had cash flow budgets or profit and loss budgets?
- Has your current business plan become outdated or is not existent?
- Are your debts increasing?
- Are you keeping up with your employer obligations?
- Have you had to stretch your creditors?
- Are you financial records Incomplete?
- Do you have little to none internal controls?
- Have your ATO debts increased?
- Have you received any Solicitors demand letters, summons etc.?
- Have you had to increase your overdraft limits?
- Have you had any pressure from your bank?
- Have you lost Key management personnel?
- Have you defaulted on any payment plans?
If you answered “YES” to any of these questions, your business is probably experiencing some financial difficulties and you should seek help. I urge you to contact you business advisor, your accountant or your lawyer and seek ways to remedy this situation and plan for survival and growth versus just sticking your head in the sand wishing it to go away.
By Karen Ng