Financial and operational restructuring is vital for many businesses in distress if they are to implement recovery measures while remaining viable and competitive in their respective industries.
It’s important to know the warning sings so you can get help with restructuring your business and stay afloat.
Ten Warning Signs of Financial Distress:
Non-payment of Tax Liabilities
A distressed business will often forgo the payment of its tax liabilities to ensure that it has sufficient cash flow to meet its wages and critical supplier payments. In the short term this may be considered by many to be an effective use of cash resources however in the long term, those tax liabilities have continued to accrue penalties, and with interest and, the liability can become unmanageable.
Entities in this situation should seek financial advice, as a restructure may resolve the Company’s cashflow problems and a repayment plan entered into with the ATO may avoid the issuing of any penalty notices.
Clients with continuing financial losses for the past two years should review their asset and liability position. Idle or non-performing assets may need to be sold, in order to purchase new assets that will generate profitable income for the Company. Financial advice in the form of an investigative accountants review could also be sought, in order to determine if there are any non-value adding processes in place that could be stopped and/or that a reduction in overhead costs and employee costs could be achieved.
No access to credit
In the vent you have attempted to secure new lines of credit or to extend existing lines of credit with no success, it may be necessary to engage an investigative accountant to consider alternative arrangements that could, in terms of repayment of debts due, to achieve some breathing space and to free up some cash in order to continue trading.
Outside trading terms with creditors and supply on Cash on Delivery (‘COD”)
When trading terms with creditors are well outside agreed the terms, like 30 out-to 60 days, and creditors are demanding that supply be made with COD, it is time to seek financial advice in order to get trading back on track.
Receiving demands and/or other legal notices
When creditors are pressing for payment in the form of final notices and or di-statutory legal demands, it will not be long before your client receives a judgement order for their debt and winding up proceedings are commenced.
Sales are decreasing
If trading has been decreasing over a period of time, it may mean your client needs to free up or obtain additional cash to promote its products and services, or that it should diversify.
Financial advice should be sought to determine your client’s place within its market and to identify its strengths, weaknesses, opportunities and threats and to develop a plan for the future.
If your client’s business is utilising the funds earmarked for employee superannuation contributions, to continue trading, financial advice should be sought immediately.
Superannuation payments should be remitted quarterly and are required to be paid withing the month after the end of each quarter. In the event the funds are not paid to the respective super funds within the specified timeframe, these amounts become a debt due to the Australian Taxation Office, under the Superannuation Guarantee Act. In addition to the principal det due, penalties and interest will be applied.
The total superannuation amount due and payable, including penalties and interest may be included in a Director Penalty Notice issued by the ATO and consequently, Directors may find themselves personally liable for these debts as well.
Excessive reliance on related parties
Without any formal loan agreement and/or repayment plan, clients may have been borrowing funds from related entities and/or family members.
In the event the client is wound up or made bankrupt, these related party debts will rank equally with all other unsecured creditors and if insufficient assets are realised, related parties may no receive dividend.
Low stock turnover
When you client’s stock is not moving and the majority of stock on hand is extremely old and or, obsolete, cash flow problems will arise. This will affect the value of assets recorded in the balance sheet and after adjustment of the stock value, a negative balance sheet position may result.
Financial advice should be sought and perhaps and independent valuation undertaken, to assess the true value of the stock on hand.
High Accounts Receivable
Your client may be experiencing difficulty in collecting its debtors, which in turn affects the accuracy of the recorded figure for total amounts owed an or the collectability of those receivable. This may lead to cash flow issues and inefficient cash management.
Your client may need to introduce a more effective debt collection process, or like many SME’s in today’s market, utilise invoice discounting or other forms of cash flow financing to ensure continuity of cash flow and to streamline the debt collection function.
There is no hard and fast rule in determining the insolvent state of your business but, if any of these signs are appearing, act quickly and ensure the best outcome for you and your business.