There's nothing worse than waking up one day to find out that your business - or that of your supplier's or customer's - has gone under. However, if you've been involved in the day-to-day running of your business, insolvency shouldn't come as a shock.
There are several key warning signs of financial trouble and only a failure to heed these signs can push your business over the edge. If you take measures to solve these problems, you could avoid a full-scale meltdown and save yourself considerable resources and stress.
One of the key warning signs of distress is an ongoing inability to pay off business debts, as this means that cash flow is so tight you cannot afford to pay suppliers.
According to the Insolvency Practitioners Association of Australia (IPA), turning over a profit and having significant assets do not protect you from business failure - if you don't have the cash flow and cash reserves to meet payment obligations, then your creditors can petition for insolvency proceedings against your business.
If you fall behind your tax payments, a general interest charge is levied on the amount and this can increase your level of tax debt. A failure to pay or work out a repayment arrangement can result in legal action, and even bankruptcy or wind-up action.
The Australian Tax Office notes that the simplest way for you to manage your tax is to pay on time. A failure to make these basic payments is always a warning sign of financial trouble, but if you find it impossible to pay on time, you should contact the ATO early on to discuss your options.
D&B's trade payments analysis reveals that businesses are taking, on average, more than 50 days to pay their bills, significantly beyond the standard 30-day repayment period. This is particularly concerning as severely late payments can tie up cash that could be used for paying your creditors, or for investment purposes. Not getting the money you're owed on time - or at all - restricts your cash flow cycle and can result in bad debt write-downs and substantial losses.
Ensure your customers pay on time by assessing their creditworthiness.
Problems selling stock
An inability to sell down inventory is a tell-tale signal that your business might be in trouble. If sales aren't coming through the door, company revenue and profit levels are affected, placing a strain on any expenses - such as purchasing new equipment, paying staff and paying the rent, for example.
Tough economic conditions have a bearing on your sales, especially if you're a retail, manufacturing or services business. However, if poor sales continue to be a pattern even when the economy and your competitors are doing well, it's time to stop and assess your sales and marketing tactics.
Inability to obtain funding
Being rejected from your 100th loan application should be a red flag that your business isn't doing well. Banks and credit providers generally have reliable processes in place to assess the creditworthiness of incorporated SMEs, so a rejected credit application may be an indicator that it's time to look at your credit report and balance sheet to see why.
There are many reasons why you've been denied finance, such as multiple defaults, poor credit ratings, previously bankrupt directors or supplier disputes. All these adverse events act against you when you apply for credit, so it's a good idea to investigate your own credit report before beginning your application to see how you are being portrayed to credit providers and to clear up any inconsistencies.