RSM Bird Cameron highlights symptoms business owners should watch for to avoid insolvency

September 8, 2011RSM Bird Cameron, one of the largest mid-tier accounting firms in Australia, highlights symptoms business owners should watch for to avoid insolvency.

According to RSM Bird Cameron the most common causes of insolvency include:
* under capitalisation
* poor financial control including maintaining inadequate records
* poor debtor management
* poor strategic management
* inadequate cash flow or inefficient cash use (cash burn rate)
* natural disasters or other unplanned business interruptions
* fraud
* director disputes
* trading losses
* economic downturn
* industry restructuring.

Andrew Graham, national head of business solutions, RSM Bird Cameron, said, “It is important for businesses to be aware of the signs of distress before it is too late. By closely monitoring your business it may be possible to turn things around in time.

“Even more important is for businesses to have controls and processes in place to prevent the business becoming distressed in the first place. This includes financial, production, organisational, and marketing controls.”

Signs of financial distress include having inadequate reserves to cover periodic contingences, ineffective control systems, cash flow, and working capital requirements.

Businesses that have poor cash flow management and inadequate reserves will find it more difficult to survive the loss of a major product or contract, will be unable to finance inflationary increases in debtors and stocks, and may find themselves having a high incidence of last minute requests for urgent temporary bank accommodation, or may even be at the limit of their current borrowing capacity.

Graham said, “Given the potentially difficult economic climate Australian businesses could be facing, it is vital to have a plan in place should they lose major customers.”

Businesses should also be conscious of consistent delays in producing financial results, delayed recognition of losses, and financial results that are not indicative of where the company is making or losing money.

Graham said, “If a business is unable to track where its money is going it is likely that resources could be seeping out of the business, which can lead to bigger issues if not reigned in quickly.”

Other key signs of financial distress include delays in dispatch of customer’s statements, high incidence of bad debts, and excessive amount of debtors in the overdue and disputed category.

Signs of distress in production include a shift in raw material availability, declining productivity and poor housekeeping.

Graham said, “Fluctuating commodity prices and uncertainty of the source of supply for production can raise concerns for businesses but is not necessarily within the realms of their control.

“Businesses need to watch for escalating costs of production, excessive downtime, and failing preventative maintenance programs. They should be constantly monitoring output to ensure they are achieving the most from available resources and reducing waste and inefficiency wherever possible.”

Organisational distress signs include the lack of a well-defined and balanced organisation structure, no clear business strategic or tactical plans or strategies and a failing business model (who your customers are and how you make money from them).

Graham said, “Businesses need to have a clear idea of where they have come from and where they are going. This includes having an up-to-date organisational chart, succession planning, formal business planning, and performance management processes.

“Reliance on a handful of people can be risky for business. If a business suddenly loses key people they may find there is no one that is across the core business. In addition, management needs to be able to delegate effectively to ensure they can focus on business planning and improvement and not get bogged down by day-to-day activities.”

Be mindful of having a balanced product range, watch for declining gross margins, vulnerability to competition, unrealistic pricing policies, and high customer or industry dependence.

Graham said, “Closely watch declining or fluctuating sales trends. If sales have declined comparative to the prior year in two of the past three years this can be a key warning sign that the business may be trouble.”

“Business managers should be across all areas of operation. If one area is starting to lapse it should be addressed immediately before other areas of the business start to show signs of distress. It is never too early to seek help and ask advice from accountants, business advisors or other business specialists to rectify issues before insolvency is the only option,” he concluded.


About RSM Bird Cameron
RSM Bird Cameron is the largest mid-tier accounting firm in Australia with national ownership and profit sharing and offers a full range of specialist advisory services, including business consulting and advisory, assurance and advisory, taxation consulting, corporate consulting and turnaround and insolvency. RSM Bird Cameron is a core member firm of RSM International, the sixth largest network of independent accounting and consulting firms in the world.