Understanding the early warning signs of insolvency
With the world in financial trouble and the economy suffering, as a result, the Australian government has always been helpful over the years in providing support to individuals and business owners. Despite this assistance, some businesses still have trouble and are forced into insolvency. Insolvency can be brought on by various circumstances, some of which are beyond a business owner’s control.
Understanding the early warning signs of insolvency is still essential if you want more options and chances to turn your company around without making a formal insolvency appointment. Here’s a list of signs according to their Stages that you might want to check:
Stage 1 signs
- Dropping sales
- Weak liquidity ratios (i.e. current, cash)
- Poor management and financial accounting information – timeliness, correctness, and dependability
- Realistic cash flow projections demonstrate a deficit that cannot be filled.
- A prominent client departs or goes belly up owing money.
- Fast-moving product lines are frequently out of stock.
- Each month, bank overdrafts are continually increased to their maximum levels.
- Older creditors are ‘blowing out’ and stretching.
- Customers are regularly late with their payments.
- Director salaries are not being paid
- Trading losses occur regularly.
- Substantial sales growth is taking place without adequate finance to support it – “growing broke.”
- Failure of a linked company that is owed money by or to the company.
- Applications for refinancing are being rejected
- BAS refund delay or non-lodgement
- Stress, marital difficulties, or other factors affecting key personnel
Stage 2 signs
- Nonpayment of superannuation
- No genuine interest in purchasing the company
- Being placed on supply stop/credit stop or cash on delivery
- repayment arrangements with creditors
- Rent and other necessary services are delayed or unpaid
- Key employees frequently change jobs.
- Extensive provisioning for bad debt or write-offs
- Disputes with auditors
- Uncontested creditors’ demands
- Making instalments, or partial payments,
- Putting employees on forced leave during an unusual closure
Stage 3 signs
- Removal of stock by creditors under the Retention of Title
- litigation or court-ordered debts
- Wages are being delayed.
- Received an eviction notice
- Get S222AOE notification from the ATO
- Receive an application to terminate
Why is it crucial to recognise the warning signs of insolvency?
It’s important to know when a company is in trouble because directors who continue to trade while the company is insolvent risk fines, being held personally responsible for the firm’s debts, or even being removed from their position as a director.
One element of insolvency that many company directors are surprised by is how quickly it may strike. There is a clear distinction between being in debt and being insolvent, even though you may be conscious that you are having some difficulty paying your payments. As a company director, you should closely check this position.
If you have any queries about business insolvency, liquidation, or voluntary administration, or if you anticipate becoming insolvent, please contact AIS. AIS will assess your financial situation and give recommendations based on our expertise and experience as specialists. Our 24/7 free helpline can be reached at 1800 210 073.