Insolvency warning signs.

What are the warning signs of insolvency that I need to be aware of with my clients?

It may seem obvious to say, that if a client cannot pay their debts when they fall due, they are experiencing financial distress. However, there are underlying (and important) components that may lead a client to this point of financial distress. 

Firstly, we must point out that if a client is in this situation and they are operating a business, they are ‘trading insolvent’. Under the Corporations Act 2001, this is an offence and there may be serious consequences (civil and criminal charges).

What are the warning signs of insolvency relating to a business? 

• • • ongoing losses
    • poor cash flow or no cash flow
    • overdue taxes or superannuation liabilities
    • outdated or poorly maintained books and records (lacking internal record keeping procedures)
    • increasing debts and/or inability to obtain further capital
    • ongoing poor sales and inability to recover revenue to satisfy expenses
    • absence of a business plan
    • legal demands for outstanding payments
    • poor relationship with their bank or regularly changing banks

Whilst each sign may look innocuous in isolation, from experience they are typically interrelated. Meaning, if you detect one of these signs, there usually will be another present (if not multiple). 

In a survey conducted by the National Australia Bank, accountants and their clients were interviewed on their perceptions (and needs) of one another. A key finding was that 1 in 5 SMEs wanted more proactive advice from their accountant.

Most Australian businesses in the last 2 years have experienced copious struggles. Unfortunately this is not unusual for the current economic conditions we are facing today and in the immediate future. However it is worth keeping in mind, the earlier that one or more of these signs are detected, the more options that are available for business recovery. 

If you are unsure on whether a client is experiencing any signs of financial distress, we recommend that they take advantage of our business health check services. We provide a free consultation to discuss key performance strengths, areas of improvements and options moving forward. 

Our commitment is to explore all options with businesses and individuals that are facing financial stress. If you have a client that may be facing financial difficulties, contact us on 1800 463 328.

Article written 23 March, 2022