Winning in your first three years

Despite a decline in formal insolvency appointments, business insolvency remains a very real risk for many new - and existing - Australian small businesses, but countless business owners are not spotting warning signs early enough according to specialist insolvency firm Jirsch Sutherland.

“We’ve noticed a fall in insolvencies in the Geelong region over the past year compared with similar periods, which is consistent with the national ASIC insolvency statistics,” says Ben te Wierik, Registered Liquidator with Jirsch Sutherland in Geelong. “But rather than being an indicator of a strong economy, I would suggest it reflects the current low interest rate environment and a less aggressive ATO.

“What it means is there’s no room for complacency – businesses need to be prepared for any eventuality.

“For a lot of small businesses, approaching their third year is a real wake up call. Statistics show that around 60 per cent of businesses* don’t make it past the first three years - which is why it’s important to take action early should there be any signs of financial stress. We strongly advise business owners to seek help early in order to be in the best shape for their next financial health check.

“Maintaining a healthy cash flow and getting regular financial check-ups are sure-fire steps towards helping your business grow and prosper.”

A common reason for the inability to save a company in financial distress is that professional advice was sought too late. A belief that ‘the next big sale’ will solve systemic problems, coupled with mounting business debts, not being able to get finance or constantly overdrawing bank facilities are all warning signs of a business in need of an urgent health check.

“No one plans for failure. But life happens: the economy fluctuates, there are unexpected debts, marriage break ups, an insolvent debtor… so many of life’s unforeseen events could change everything - including your business bouyancy. But early intervention can help turn a business around, or, if the business can’t be saved, to minimise the financial and emotional impact of its failure” says Ben.

5 simple tips to help your business thrive and reduce risk of insolvency:

Focus on cash flow

Struggling with a day-to-day cash flow deficit puts a strain on your entire business and limits growth. Since cash flow is the lifeblood of any business, implementing a solid billing and debt collecting system will inject much-needed circulation of funds. With ‘credit clients’, ensure you have well drafted trading terms in place, specifically applicable to your business, to allow early and effective intervention when those terms are not adhered to.

Watch for warning signs

It’s easy for business owners to get bogged down in operations, often missing key warning signs of failing health. Keep an eye out for increasing debts, overdue tax and super payments, mounting stock levels, high staff turnover and problems getting finance.

Explore ways to reduce your overhead costs

Explore creative ways to reduce your overheads such as, negotiating cheaper insurance premiums, revisiting utilities expenses regularly, investigating alternative supplier relationships. The more money that can be saved, the more that can be used for growth or put towards reducing debt. This will increase your financial attractiveness, and when your creditors see you're serious about paying them back, they might be more willing to negotiate to more favourable terms for the relationship. 

Negotiate with your creditors

Continually review your trading relationships. As with your customers, it is important to negotiate the trading terms with your suppliers. Trade credit is not a right, but likewise your suppliers will acknowledge and support the businesses that understand the symbiotic relationship – as you grow, they grow. With the help of a financial specialist, you may be able to reach an arrangement with your creditors such as providing you with reduced personal risk, increase repayment periods or early payment discounts.

Get advice

Your bank balance it not always an indicator of the financial strength of your business. Only seeking help once the piggy bank has been cracked open and the lounge cushions flipped will limit the options available to make effective adjustments to preserve a business.

“If you suspect your business is in financial difficulty, it’s important to get proper accounting and legal advice as soon as you can, as this increases the likelihood of the company surviving,” says Ben. “A business owner can turn around a struggling business by working on ways to generate cash flow and build profits. But wth times of financial distress comes high emotion. It’s important to take emotion out of the equation and do a critical review of all areas of your business, and this is where independent advice can help guide business owners to the right path.”

*Australian Bureau of Statistics

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