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Insolvency

10 Early Warning Signs Of Insolvency

Take the necessary steps to avoid corporate insolvency and be aware of these 10 early warning signs of insolvency.

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Running a business is not easy. We all know what it’s like day in and day out. Aside from the pressure on ensuring clients are satisfied and employees are happy, many uncertainties and unforeseen circumstances may affect your business and challenge you to keep the business afloat. Often, these challenges present themselves in the form of financial difficulties. And therein lie many risks for businesses in Australia. Financial difficulties can be early signs of corporate insolvency.

To help you ensure you’re well prepared for any risk and handle conflicts before they get worse, you need to be aware of the early warning signs of insolvency.

Remember, the faster you act on these early warning signs, the better chance you have to turn things around before it’s too late.

Early Warning Signs of Insolvency

1. Disorganised books and records

Having disorganised records is something to worry about. Reviewing your financial standing won’t be accessible if your books are mismanaged and your documents and files are messy. And a lack of understanding of your financial matters can lead to poor economic and business management. 

It can also be a red flag for your business in the eyes of ASIC. When you go into liquidation, a liquidator can present your mismanaged books and records as an indicator of business issues.

2. Unclaimed payments from customers

Of course, profit is significant to keep the business running. The business will suffer if it does not receive any money. Customers not paying on time can lead to serious cash flow issues. There might be a lot of reasons for late payments. Your customers may have financial problems, too. If this happens, it’s time to look for ways to improve your collection process before the situation worsens.

3. Your application for additional funding is rejected

You may want to access additional funding if your business is in financial distress, whether from banks, related parties or shareholders. However, if your overdraft has reached its maximum or you have a poor relationship with a bank due to loan defaults, it may be harder to obtain financing. Similarly, suppose related parties and shareholders are reluctant to inject money into your business. In that case, it may indicate a lack of trust or that your business has little to no prospects for success and profitability.

4. Use personal funds to support the business

Suppose you’re starting to use your funds to keep your business afloat, probably because you’re having cash flow difficulties or trouble obtaining additional funds from other sources. In that case, it may be a telltale sign that your business is at risk of insolvency.

This not only poses a significant risk for your business. If this gets worse and out of hand, you may also be at risk of personal debt.

5. Negative working capital

Your working capital balance is the difference between your company’s assets and liabilities. This gives a snapshot of your company’s financial situation and indicates how much you have to cover your debts. If your working capital amount is negative, you have cash flow problems and cannot pay your debts due to insufficient balance.

6. Internal disputes and conflicts

Issues within the company arising from conflicts over business decisions and succession planning can lead to irrational decision-making. This can, in turn, cause the business to suffer. When this happens, the company may be put at risk of insolvency.

7. Missed BAS lodgement or payments

If you’re struggling to pay your business taxes, you have a cash flow problem. You have to be careful when this happens because failure to lodge on time will lead to penalties from the ATO. If you need more time to settle your tax liabilities, you may still lodge your BAS on time and set up a payment plan with the ATO to be given a longer time to pay your dues. But remember that payment plans to pay off your debts are also early warning signs of insolvency.

8. Unpaid superannuation

This is one of Australia’s earliest and most common signs of insolvency. Paying your employees super is your obligation as an employer. From 1 July 2023, all employees aged 18 and above are entitled to SG at 11% regardless of how much they earn. If you’re having trouble paying super on time due to cash problems, it’s an early sign that you’re at risk of insolvency. Not to mention that failure to pay super may lead to penalties and could hold the directors liable. 

9. Poor staff retention

High employee satisfaction is an indicator of a healthy business. However, if employees become dissatisfied, your work capacity may be compromised. This could potentially decrease customer satisfaction and profit. Delayed wage payments or their salaries may cause disgruntled employees not to be competitive enough due to the business’s cash flow problems.

10. Unable to pay invoices from creditors

Being frequently unable to pay your invoices from creditors by their due dates may imply that you don’t have enough funds to settle your debts. If your creditors, suppliers, or landlords constantly give you payment reminders or make frequent follow-up calls asking you to pay your invoices, this is a sign you might be insolvent.

 

Is your company at risk of insolvency?

Suppose your company is experiencing any or some of these warning signs. In that case, it’s time to re-evaluate your position and take necessary actions to save your company before it worsens. It’s always best to seek professional advice to ensure that you’re making sound business decisions to help your company survive.

At Clout Advisory, we offer insolvency advice on corporate restructuring and strategic business and financial advisory to prevent insolvency and lessen the effects of these risks and threats to your business. Contact us today to discuss your situation and what we can do to help keep your company afloat and secure your future.

 

The information provided in this article is general and does not constitute business and financial advice. Every effort has been made to ensure the notification is accurate, but information may become outdated as legislation and new government announcements are made. Individuals should not rely on this information to make a business decision as it does not consider their circumstances. Before making any decisions, we recommend you consult a licensed advisor to view your situation and needs.

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