Four warning signs your business may be in crisis

Roger Mendelson, CEO of Prushka Fast Debt Recovery

Most business failures are swift and clean; with the business quietly closing down, the creditors being paid out and the business operator moving on to do something else. Invariably though, it involves a significant loss of money and also results in dreams being dashed.

There are also the failures where the effect on the business owner is catastrophic. It can include a creditor or the Australian Taxation Office taking action to sue the business operator or wind up the company.

This may well result in bankruptcy, the loss of their home and will leave a black mark on their credit rating which will be difficult to overcome in the future.

In my experience, business operators are, by their very nature, optimistic people. It is this optimism which drives them each day to work hard and deal with the many pressures and stresses involved in running a business. However, business optimism also has a negative side to it.

Figures released in June by The Australian Financial Security Authority showed that in the June quarter 2015, 16.3 per cent of debtors entered a business related personal insolvency. This is a rise from 15.5 per cent in the March quarter 2015. Furthermore, 22.1 per cent of bankrupts entered a business related bankruptcy. This is a rise from 19.9 per cent in the March quarter 2015.

With economic conditions cited as the most common business related cause for business related bankruptcies and business related personal insolvencies, knowing the warning signs can mean make or break for a business.

It is common for business owners to miss the critical warning signs and focus on a turnaround when in reality the business may be heading toward extinction.

There are four key warning signs to watch out for, highlighting that your business may be heading for trouble:

  • You are falling behind in your payments to the ATO, whether that be GST or tax deductions from employees.

  • You are under increasing pressure from your creditors; their phone calls are increasing and they are becoming more strident and demanding.

  • You are finding it hard to get credit; your existing suppliers are shutting the door and now demanding cash on delivery and new suppliers have become wary of you.

  • You are under pressure from your bank; they will not extend your overdraft, are bouncing cheques and putting pressure on you to reduce your overdraft.

If any of the warning signs are present, the worst thing you can do is put your head in the sand and think that somehow everything will come good. At this stage, the clock is ticking and you must act quickly if you want to avoid disaster.

The first step is to call in an external accountant to carry out a cash flow review and assess whether or not your business is viable. Many businesses can be saved but require the advice of an experienced, accountant or adviser.

If the accountant concludes that your situation is dire, the next step is to bring in an accountant specialising in insolvency to develop a future strategy.

In the absence of this, you may well find that you have lost control of the situation and your personal assets are now likely to be at risk.

If, however, the accountant feels your business can be recovered, they will work with you to develop a strategy for getting on top of what you owe.

The ATO is the most dangerous enemy a business owner can have due to significant powers beyond those of other creditors. Ensure you manage your ATO obligations first; it is imperative you make contact with them to organise a payment plan.

From there, contact your other creditors and do the same. You would be surprised how often simply calling and showing you are making the effort to pay them will significantly help your situation.

Ultimately it comes down to recognising the warning signs and being able to act early. The later you realise your businesses is heading in the wrong direction, the more difficult it will be to save.

This article originally appeared on Business First Magazine.

Roger Mendelson is CEO of Prushka Fast Debt Recovery Pty Ltd and is a principal of Mendelsons Lawyers Pty Ltd. Prushka acts for in excess of 52,000 small to medium size businesses across Australia and operates on the basis of NO RECOVERY - NO CHARGE service. Roger is also the author of The Ten Mistakes Businesses Make and How to Avoid Them and Business Survival.