Business insolvency is a very real risk for many new and existing Australian small businesses, but countless business owners are not spotting warning signs early enough. That’s why specialist insolvency firm Jirsch Sutherland together with accounting firm Nexia Australia and New Zealand are urging SMEs across the country to take a serious look at the financial health of their business.
“For a lot of small businesses, approaching their third year is a real wake up call,” says Andrew Spring, Jirsch Sutherland Partner.
“Statistics show that around 60 per cent of businesses don’t make it past the first three years – which is why it’s important to take action early should there be any signs of financial stress. We strongly advise business owners to seek help early in order to be in the best shape for their next financial health check. Maintaining a healthy cash flow and getting regular financial check-ups are sure-fire steps towards helping your business grow and prosper.”
What are so many businesses failing?
According to Paul Lenton, Managing Partner with accounting firm Nexia Australia Sydney office, people have a romantic notion of being their own boss, but they haven’t done enough preparation – particularly research on the market and what’s involved. “Too many small business owners just look at their bank accounts, see they have money in there and assume they’re doing well,” Paul says. “But they haven’t taken into consideration accumulated creditor and tax debt; they haven’t factored in they have to pay these debts. And then they pay them and all the money disappears.”
A common reason for the inability to save a company in financial distress is that professional advice was sought too late. A belief that ‘the next big sale’ will solve systemic problems, coupled with mounting business debts, not being able to get finance or constantly overdrawing bank facilities are all warning signs of a business in need of an urgent health check.
“No one plans for failure. But life happens: the economy fluctuates, there are unexpected debts, marriage break ups, an insolvent debtor… so many of life’s unforeseen events could change everything – including your business bouyancy. But early intervention can help turn a business around,” adds Andrew Spring.
1. Preparation is key
“Would you run a marathon without doing training?” asks Nexia’s Paul Lenton. “No you wouldn’t. And the same goes with starting a business. Preparation is crucial.” Do your research – research the market and what’s involved, take into consideration all the aspects of running a business, put together a business plan and a formal financial model.
2. Focus on cash flow
Struggling with a day-to-day cash flow deficit puts a strain on your entire business and limits growth. Since cash flow is the lifeblood of any business, implementing a solid billing and debt collecting system will inject much-needed circulation of funds. With ‘credit clients’, ensure you have well drafted trading terms in place, specifically applicable to your business, to allow early and effective intervention when those terms are not adhered to.
“One of the biggest issues for start ups, in particular, is having no formal financial model – and that includes cashflow,” says Paul. “Cashflow timing, including the growth of working capital and tax payments, needs to be factored in.”
3. Watch for warning signs
It’s easy for business owners to get bogged down in operations, often missing key warning signs of failing health. Keep an eye out for increasing debts, overdue tax and super payments, mounting stock levels, high staff turnover and problems getting finance. “It’s good to put in place reference points – e.g. 3 months, 6 months, 12 months – and if you start going off track, you need to seek expert advice,” says Paul.
4. Explore ways to reduce your overhead costs
Explore creative ways to reduce your overheads such as, negotiating cheaper insurance premiums, revisiting utilities expenses regularly, investigating alternative supplier relationships. The more money that can be saved, the more that can be used for growth or put towards reducing debt. This will increase your financial attractiveness, and when your creditors see you’re serious about paying them back, they might be more willing to negotiate to more favourable terms for the relationship.
5. Negotiate with your creditors
Continually review your trading relationships. As with your customers, it is important to negotiate the trading terms of your relationship with your suppliers. Trade credit is not a right, but likewise your suppliers will acknowledge and support the businesses that understand the symbiotic relationship – as you grow, they grow.
With the help of a financial specialist, you may be able to reach an arrangement with your creditors such as providing you with reduced personal risk, increase repayment periods or early payment discounts.
6. Get advice
Your bank balance it not always an indicator of the financial strength of your business. Only seeking help once the piggy bank has been cracked open and the lounge cushions flipped will limit the options available to make effective adjustments to preserve a business. An insolvency specialist can provide expert advice at the first signs of concern to ensure all options are understood and a considered approach is taken to redirecting the business back towards success.
“If you suspect your business is in financial difficulty, it’s important to get proper accounting and legal advice as soon as you can, as this increases the likelihood of the company surviving,” says Andrew. “A business owner can turn around a struggling business by working on ways to generate cash flow and build profits. But in times of financial distress comes high emotion. It’s important to take emotion out of the equation and do a critical review of all areas of your business and this is where independent advice can help guide business owners to the right path.”