by Paul Gidley21.12.15

If you’re a business owner or director, it is important to always remain mindful of the early warning signs of corporate insolvency. Recognising and acting on the warning signs at the earliest possible opportunity empowers business owners to renew, improve and where necessary restructure your business’s affairs.

 1. Business Aesthetics

An inspection of a business’s premises can provide an indication of financial distress. Often if a business is struggling it shows physical signs of deterioration such as poor maintenance and cleaning. Low staff morale and loss of good staff to competitors are often factors.

 2. Forecasts and Business Plans

Every business requires a detailed cash flow forecast and business plan, to ensure that business owners can make informed decisions.

A business that fails to plan, plans to fail.

 3. Poor Maintenance of Books and Records

A business’s ability to maintain adequate financial records is generally a good sign of the business’s health. When a business is experiencing difficulty, business owners tend to spend less time maintaining books and records. It is imperative that procedures are in place to prevent this from happening.

 4. Overdue or Missed Tax Payments

When a business is experiencing difficulties, it will often try to improve its short term cash flow by prioritising payments that are required to continue the day to day operations and delaying most other payments. The most common types of delayed payments are those owing to the Australian Taxation Office in relation to GST and PAYG.

Recent amendments to the Director Penalty Notice Regime mean that Directors are now automatically personally liable for outstanding PAYG Withholding Tax, should the amount remain unreported and unpaid within three (3) months of the due date.

 5. Superannuation Contributions Not Paid on Time

Superannuation contributions may also be delayed to assist with short term cashflow. As contributions are normally made at the end of every quarter, it may not be noticed that contributions are overdue, until they are well overdue.

Similar to outstanding PAYG Withholding Tax, recent amendments to the Director Penalty Notice Regime means that Directors are now automatically personally liable for superannuation contributions that remain unreported and unpaid within three (3) months of the due date.

 6. Creditors Paid Outside of Trading Terms

Creditors’ terms beyond agreements or industry standards are evidence that a business is not meeting its present obligations. Although each industry has different benchmarks, it is generally accepted that creditor accounts exceeding forty-five (45) days raise concerns.

 7. Bank Overdraft Limit Exceeded

While it is commonly understood that a bank overdraft should not be drawn on to its full extent, monitoring the general use of the overdraft can provide an insight into the business’s cash flow resources. A business operating at its maximum overdraft may not have emergency funds, if needed.

 8. Dishonoured Cheques

Withholding of payments to creditors, dishonoured cheques and dishonour fees are clear signs that a business may not have sufficient financial resources.

 9. Relationships with Suppliers

When a business has a history of delaying payments to creditors, suppliers may place the business on cash on delivery terms. A change of this nature or entering into payment arrangements to manage overdue accounts, indicates that suppliers have concerns of the business’s ability to make its payments on time.

 10. Legal Action

Legal action taken against a business for the recovery of outstanding debts is often the tipping point for a business’s failure. Statements of Claim issued against a business are a major concern as they could result in the business being placed into involuntary liquidation. Legal demands, winding up applications and director penalty notices should not be taken lightly.

Shaw Gidley are experts in restructuring, turnaround and insolvency and provide free initial advice on these matters. Please contact our offices on (02) 4908 4444 or (02) 6580 0400.