15 warning signs of financial stress on your business (and what to do about it before it’s too late)
The key to turning around an under-performing business is identifying the issues early, so you have time to take positive action. It’s critical you heed the warning signs of financial stress so you can seek urgent independent, professional assistance and put an action plan into place. The fortunes of most businesses fluctuate significantly from month to month, particularly in those challenging first few years. How do you distinguish whether your troubles are signs of short-term blips or terminal obstacles?
Role of a director
A director, among many other obligations, has a duty to prevent a company from trading while insolvent – however new Safe Harbour provisions support directors who act in good faith to turn their business around (strict criteria apply). Directors must know and heed the warning signs if they are to avoid potentially becoming personally liable for the company’s debts.
15 warning signs of financial stress
There are numerous warning signs that a company is experiencing financial stress and is, or is at risk of becoming insolvent. They will vary from business to business, but here are some of the major ones:
1. History of trading losses
2. Cash flow difficulties
3. Failure to pay Commonwealth and State taxes when due (PAYG, GST or SGC)
4. Difficulty collecting accounts receivable
5. Low stock turnover rates
6. Creditors placing the company on cash-on-delivery terms and/or requiring special payments on existing debts before they will supply further goods and services
7. Legal action is being threatened or has commenced against the company
8. The company has reached the limits of its funding facilities and is unable to obtain appropriate further finance
9. The company is unable to produce accurate financial information on a timely basis
10. Company directors have resigned, citing concerns about the financial position of the company
11. The company auditor has qualified their audit opinion on the grounds there is uncertainty that the company can continue as a going concern
12. The company has defaulted, or is likely to default, on agreements with its financier(s)
13. Employees, or the company’s bookkeeper, accountant or financial controller, have raised concerns about the company’s ability to meet its financial obligations.
14. There are no liquid assets that can be sold to satisfy liabilities without affecting the company’s ability to trade profitably
15. A judgement &/or Statutory Demand have been issued against the company
If a company is experiencing any one or more of these warning signs there is a significant risk that it is, or is about to become, insolvent. Section 588G of the Corporations Act imposes personal liability on directors who have allowed a company to trade while insolvent (unless they meet Safe Harbour provisions).
Seeking timely help from a professional advisor can be the difference between the company sinking and exposing the director to personal liability, or implementing strategies to allow the company to turn things around and trade out of financial difficulties.
Actions for directors
To minimise the risk of personal liability, and to fulfil their duties as a director, it is critical that a director acts promptly if any of the above warning signs are identified. Prompt action also maximises the chance of a successful restructure of the company and the continuation of the business.
In these circumstances, a director should take the following steps:
1. Read ASIC Regulatory Guide 217 – Duty to prevent insolvent trading: Guide for Directors and ASIC Information Sheet 42 – Insolvency: A guide for directors in full;
2. Remain informed as to the financial position of the company, ensuring that the company maintains proper financial records and prepares relevant financial information;
3. Make all reasonable inquiries to enable them to have an understanding of the financial position and cash flow requirements of the company at all times;
4. Immediately investigate the causes of any financial difficulties;
5. Obtain independent, professional advice in relation to their specific business circumstances; and
6. Act in a timely manner on the advice obtained.
If you are concerned your business is facing difficulties and you’d like the guidance of an experienced, independent advisor who has helped hundreds of businesses to navigate financial challenges, contact the directors at Financial Distress Solutions today on 1300 747 577 or email admin@financialdistresssolutions.com.au