Insolvency signs to watch out for

RSM_Bird_Cameron_Logo@2xApril 30, 2013 – While some industries are showing signs of improvement in the current market there are others, such as the construction sector, still facing many challenges. RSM Bird Cameron, one of the largest mid-tier accounting firms in Australia, offers advice on how to recognise the early signs of insolvency.

Andrew Graham, national head of business solutions, RSM Bird Cameron, said, “It is important for businesses to be aware of distress signs before it is too late. By closely monitoring your business it is often possible to catch a change in performance early enough to turn things around.”

Signs to look for and how to address them

Signs of financial distress include:
* inadequate reserves to cover periodic contingencies
* ineffective control systems, cash flow and working capital requirements
* delays in the dispatch of customer statements
* frequent or large value bad debts
* too many debtors in the overdue or disputed category.

A business with poor cash flow management or inadequate reserves will find it difficult to survive the loss of a major product or contract.

Graham said, “These businesses are unable to finance inflationary increases in debtors and stocks. They 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.

“It is therefore vital to have a proactive plan in place should they lose major customers.”

Businesses should be wary of persistent delays in producing financial results, the delayed recognition of losses or financial results presented in a format that doesn’t clearly explain if the company is making or losing money.

Graham said, “If a business cannot track where money is going the risk of resources seeping out of the organisation rises significantly. Accurate, timely reporting is essential to minimising the impact of financial distress.”

Signs of distress in production include:
* a change in the availability of raw material
* declining productivity
* poor housekeeping.

Graham said, “Fluctuating commodity prices and uncertainty about a supplier’s ability to deliver can raise concerns. These issues are not always within their control.”

Businesses need to watch for escalating costs of production, excessive downtime caused by breakdowns or delayed supplier deliveries and preventative maintenance programs that aren’t working. They should be constantly monitoring output to ensure they are achieving the most from available resources and reducing waste and inefficiency.

Organisational distress signs include:

* a lack of a well-defined and balanced organisation structure
* no clear tactical plans or strategies
* a failing business model.

Graham said, “Businesses need to have a clear idea of where they have come from and where they are going. This includes having effective processes in place for succession planning, formal business planning and performance management.”

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.

Marketing signs of distress include:
* an unbalanced product range
* gross margins in decline
* vulnerability to competition
* unrealistic pricing policies
* high customer or industry dependence.

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


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 seventh largest network of independent accounting and consulting firms in the world.