RSM Bird Cameron urges business managers not to use economic indicators as the only source of information about business health

September 1, 2011RSM Bird Cameron, one of the largest mid-tier accounting firms in Australia, is urging businesses to be aware of economic indicators when evaluating their business but not to use them as the only source of information when determining their level of exposure to risk and overall confidence.

Andrew Graham, national head of business solutions, RSM Bird Cameron said, “The important thing for businesses to remember is that the various economic indicators are just that, indicators, and don’t necessarily impact every business the same.

“In addition, some indicators can impact positively or negatively depending on the type of business and the industry it is operating in. For example, the high Australian dollar is good for importers but not for exporters. The indicators need to be assessed individually and in context.

“There is no doubt that an economic downturn can spell the end for some businesses, and businesses are facing a volatile climate at present. This is demonstrated by a surge in insolvencies and the appearance of increased activity by the ATO in collecting long-standing tax debts, which have built up, particularly during the global financial crisis.”

The key economic indicators for businesses can include:
* the Australian dollar
* interest rates
* big business cancelling major projects and/or cutting staff
* headlines such as retail sales
* cash burn rate
* changes in invoice payment times
* the stock market.

Graham said, “Businesses should be paying close attention to interest rates as decreases only happen for a reason, and can be a sign of trouble ahead. They should also watch what big business is doing as they are often the first to experience distress. Cancelling large projects and cutting staff can have a flow-on effect.

“Businesses should monitor, but pay less attention to, the stock market. While fluctuations create uncertainty, often these fluctuations really have nothing to do with the actual health of many businesses but are more representative of general investor confidence and sentiment.

“It is important for businesses to be aware of what is happening in the market but it is equally important to take a step back and objectively assess whether your business is really showing signs of distress before becoming excessively concerned. Economic downturn is just one reason that businesses become insolvent.”

Other major causes of business failure, which can lead to insolvency, are more likely to include:
* under capitalisation
* poor financial control including inadequate records
* poor debtor management
* poor strategic management
* inadequate cash flow or high cash use (increased ‘cash burn’ rate)
* natural disaster
* fraud
* director disputes
* trading losses
* lack of innovation or product development
* contracting markets
* out dated business model
* industry restructuring.

Graham said, “It is important for businesses to be aware of the causes of business failure, and to have controls and processes in place to mitigate the risk of becoming insolvent.”


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.